With 263 million estimated global cannabis consumers and a total addressable market of $344 billion (illicit and legal combined), cannabis is poised to make a material impact on the global economy. As the cannabis markets in Europe, Latin America, Asia and even Africa are beginning to take shape, one commonly overlooked regulatory detail is the effect of taxation on the potential success of these new markets. Specifically, how higher than needed taxes can not only inhibit new market entrants ability to operate effectively, but can also fuel growth within the illicit market.
To that point, while still federally illegal, existing U.S. state cannabis markets provide crucial lessons for emerging legal markets. California, for example, imposed an effective tax rate of nearly 40-50% on retail products causing many consumers to stay loyal to the illicit market. It resulted in a massive dip in projected state tax revenue in their first year of legalization- nearly 90 million dollars short of their goal.
“Tragically, this is not the first time we have seen poorly thought-out imposed taxes have the exact opposite effect than intended;” said Giadha Aguirre de Carcer, Founder and CEO of New Frontier Data, “during our early years observing new U.S. states legalize, consumers in both the states of Oregon and Washington turned to local illicit producers offering more affordable pricing, leading the states to experience growth in their respective cannabis black markets instead of generating additional tax-revenue for the state.”
Anticipating the elasticity -the sensitivity of consumers to prices and price changes -along with other crucial factors such as identification of consumer preferences, is critical when establishing new cannabis markets. Without understanding such delicate market drivers, countries and states alike will fail to meet projected socio-economic goals. Leveraging lessons learned from existing cannabis markets, policy makers can today better plan ahead and avoid such pitfalls to instead maximize growth opportunities of a healthy and balanced legal cannabis domestic market.
“Data and reporting” Beau Whitney, Senior Economist at New Frontier Data says, “are crucial for understanding how to generate maximum revenue, to identify and to eliminate bad actors, and to ultimately better serve consumers and patients so that they do not turn to the black market.” Oregon’s standardization process is one program Whitney believes is currently effectively utilizing data management. For example, Oregon’s model on certifying testing labs and standardizing laboratory testing help elevate minimum quality standards expected by consumers and making it difficult for bad actors to compete.
In short, regions and nations with heavy pockets of cannabis consumers, looking to transition into a legal and regulated market, must better understand consumer preferences, including price sensitivity, so that state imposed taxes work in favor of domestic and regional socio-economic goals, rather than fuel crime and continued illicit trade.
For more insights into the global cannabis industry, follow along with New Frontier Data’s research at www.newfrontierdata.com.
Check out New Frontier Data’s Beau Whitney provide a global cannabis market overview at the International Cannabis Business Conference in Berlin on April 2nd, 2019. Next up for the ICBC: Zurich on May 15-16. Discounted, early bird tickets are on sale until April 24th.