Is Cannabis Tax a Good Thing?

The "new" cannabis industry has encountered rapid growth, and its current value is over USD 13 billion in the US alone. 

What is continually forgotten in the context of these legalised enterprises is that for decades, cannabis has been an essential agricultural export of various low and middle-income countries (LMICs), including Morocco, Lebanon, Albania, Colombia, Mexico, Lesotho and Malawi.

However, developed countries have initially dominated the new legal market. The world's largest legal exporter of cannabis in 2018 was the UK, with the US and Canada closely behind as they quickly expanded production.

In recent years many countries are previously known as illegal exporters either proceeded with legalising cannabis production and exports, like Lesotho and Colombia or were in the process of doing so, like Morocco and Mexico. 

Legalising cannabis has become an exciting strategy in terms of an employment and industrial policy perspective. But, it also provides another potential upside for LMIC governments: taxation. These middle-income countries are  the home to as much as  75% of the global population as well as 62% of the world's poor.

Most regions that have legalised cannabis collect taxes on its production and eventual sale. For example 2018, California amassed over USD 350 million in cannabis taxes. Colorado and Washington, however, could only collect approximately one per cent of their state and local own-source revenue through cannabis taxation. 

Methods of collection and calculation rates vary and range from a percentage of the sales price to the THC potency of the product. 

There are, however, many great reasons why cannabis taxation could have particular advantages for the revenue of LMIC countries. The first point is the revenue potential itself.

The potential tax income for countries that have historically produced large quantities of cannabis, like Morocco, could be substantive as they are calculated to grow over 35,000 metric tons annually. 

Where consumption is already legalised domestically, cannabis taxation fits neatly into an increasingly favoured set of 'sin taxes', such as levies on alcohol, tobacco or sugar. Their popularity has been grounded in their ability to contribute to similar public policy goals, such as raising revenue for public health systems and reducing the consumption of damaging goods, thereby increasing health outcomes.

To make the most of the benefits associated with a growing legal cannabis market, LMICs must keep a variety of key challenges in mind. Some critical issues include the following:

Cannabis farming is closely connected with environmental and social sustainability topics. In areas of more traditional cannabis cultivation, the boom in cannabis has put pressure on natural soil and water reserves. Farming communities that have relied on cannabis cultivation for their livelihoods for a long time will not necessarily benefit from legalisation. Their role in a new market will be directly decided by what the newly legalised market looks like.

While legalising cannabis production creates a new legal channel for sale and export, believing that illegal markets will disappear is a big mistake. 

Illegal chains may persist if they deliver a more profitable opportunity for producers or exporters. Therefore, any design of new legal production channels and respective tax policies must bear these developments in mind.