Good evening, Chairperson Casey, Vice-Chairperson Davies, Vice-Chairperson Webber, and other distinguished members of the Standing Committee on Health. Thank you very much for the opportunity to testify before you today.
I am a senior policy researcher at the non-profit, non-partisan RAND Corporation where I co-direct RAND's drug policy research centre. Over the past two years, I've been fortunate enough to travel to Canada multiple times to meet with researchers, policy-makers, and members of the task force to talk to them about Canada's policy and provide an objective assessment about what is happening with cannabis legalization in the United States.
I was invited today to testify about my general thoughts on Bill C-45 and on some of the international implications if it passes. I want to make it clear that RAND does not take positions on legislative bills or ballot initiatives. My goal for today is solely to help inform Canada's policy debate at the federal, provincial, and municipal levels. I will divide my comments into three sections: prices, taxes, and the international implications.
With respect to prices, many of the outcomes featured in debates about legalizing cannabis will be shaped by its retail price. For example, those seeking to reduce the size of the illicit market will want the retail price to be competitive enough to move users to the newly legal market. On the other hand, those concerned about an increase in problem cannabis use and cannabis use disorders will want to prevent retail prices from significantly declining because cannabis users are price sensitive.
Over time, legalization is expected to dramatically reduce the production and distribution costs of cannabis for many reasons. Most important is getting rid of the risk. Right now when people buy heroin, marijuana, or cocaine, a lot of what they're doing is compensating the drug dealers and everyone else along their supply chain for the risk of arrest and risk of incarceration. With legalization, that goes away. Also, firms will be able to take advantage of economies of scale as they move from producing in backyards and basements to larger farms and facilities. Also it will be easier to take advantage of advances in technology if the activity is legal.
For those who are concerned about an increase in cannabis consumption and use disorders that are related to a price drop, jurisdictions have several options. I want to talk briefly about six of them. The first option to help inflate the price would be to implement a government-run monopoly and it sounds as if that's what Ontario is thinking about doing. When the government has that control, it can set the price. The second option is to minimize competition. If you are going to allow private firms to get involved, you can minimize the number that are competing so that should help reduce a drop in price.
The third option would be to cap production. A fourth option would be to impose costly licensing fees and/or regulations such as accurate testing protocols. For example, requiring cannabis producers and/or processors to submit to rigorous product testing for potency and adulterants ends up driving up costs to the firm, which are then passed on to the consumer in the form of higher prices. This can also help protect public health. The fifth option for keeping the prices higher is to require minimum pricing, and Canada does have experience with that with respect to alcohol. The final option would be to levy cannabis taxes.
Before I get into more detail about cannabis taxes, I want to make it very clear about the trade-offs involved when we're talking about prices. Realize that if your goal is to eliminate the illegal market as quickly as possible, you're going to want to minimize regulations and you're going to want that price drop to happen as quickly as possible. Now if you're concerned about the public health implications of a price drop, you're going to want to take actions to inflate that retail price. It's important to acknowledge this trade-off and realize that people have different goals for legalization. Just acknowledging that can lead to more productive discussions throughout the country.
Now back to taxes. Let's make it clear, nobody knows the best way to tax cannabis, and there are trade-offs with all the options. For example, taxing as a function of price is attractive because it's very easy to apply. For example, Washington State levies a 37% tax at the retail level, but the main drawback to that particular option is that the tax revenue per transaction will fall as the price falls.
Another option is to tax as a function of weight. For example, Alaska applies a $50 per ounce tax at the wholesale level. Once again, it's also easy to apply but some are concerned that it creates incentives for the producers to sell more potent cannabis. We know very little about the health consequences, both the risks and the benefits, of these higher-potency cannabis products that are being sold in the stores in Washington and Colorado. We realize that most of the research that's been done on the health effects of cannabis was largely based on people who were smoking lower-potency cannabis in the 1980s and the 1990s. We have a lot of research to do.
Another option is to tax cannabis as a function of THC, which would allow the government to nudge cannabis users to lower potency products. Such an approach is similar to how many countries typically tax alcohol, with higher taxes imposed on products with higher ethanol content. The final report of the task force recommended that Canada develop strategies to encourage consumption of less potent cannabis, including a price and tax scheme based on potency, to discourage purchase of high potency products, but Bill C-45 is largely silent on this issue.
I now want to focus my final comments on the international implications. I will largely focus on the movement of people and cannabis across international borders, and I want to say a few words about the banking situation in Uruguay.
I will not speak to Canada’s international drug treaty obligations and the various options Canada could pursue if it legalizes cannabis for non-medical purposes, including doing nothing. I will note, however, that what Canada does, and perhaps more importantly, how other countries respond to those actions, could send a signal to other countries about their drug treaty obligations. Given Canada’s size, its proximity to the United States, and its status as a member of the G7, national legalization in Canada could have a much larger international impact than the legalization of cannabis in Uruguay.
With respect to the movement of people across international borders, drug tourism will happen if provinces and territories do not limit sales to Canadian residents. If provinces and territories allow public consumption in cannabis cafés or cannabis lounges, this will make tourism even more attractive.
There is also the issue of Canadians being denied entry to the United States because of cannabis consumption or previous arrests. It is unclear whether the United States will change its approach if Canada legalizes cannabis, and if it does change its approach, whether that will become more or less strict.
With respect to the movement of cannabis across borders, we must acknowledge that this is already happening via legal and illegal channels. Currently, Canada legally exports cannabis products to some countries for medical or research purposes. As for smuggling cannabis and money across the U.S. border, the amount, as well as the direction, will depend on cannabis production costs, retail prices, risk of arrest, and oversight on both sides of the border.
Finally, Canada should pay attention to the cannabis banking issue in Uruguay. While Uruguay legalized cannabis for non-medical purposes in December of 2013, residents could not purchase it at pharmacies until July 2017. Then last August it was reported that U.S. banks would stop doing business with banks in Uruguay that provided banking services to pharmacies selling cannabis. In response, The New York Times noted that the Uruguayan banks warned some of the pharmacies over the last few weeks that their accounts would be shut down.
Now it is unknown whether U.S. banks would apply the same pressure to Canadian financial institutions doing business with Canadian entities suppling cannabis for non-medical purposes, but if Bill C- 45 passes, this possibility should not be ignored.
In sum, the federal and provincial governments will confront complex decisions if Bill C- 45 passes. Because it is hard to predict the international and domestic consequences of these choices, jurisdictions considering alternatives to prohibiting cannabis supply should proceed cautiously and build flexibility, especially with respect to prices and taxes, into the proposed regulations.
With that I will close, and I look forward to your questions and comments.