How will the legalization of cannabis in Canada, expected in October 17, 2018, change these costs and their distribution across Canada’s levels of government? And consequently, how should revenues raised to deal with the public impact of legalized cannabis be shared across our levels of government? Sharing the Costs of Cannabis in Canada: How the federal and provincial governments should split cannabis tax revenues, a new report from the Mowat Centre, takes an in-depth look at this question.

Here are the key takeaways from our analysis:

• Based on an accepted principle, the societal costs of cannabis consumption should be at least partly offset by revenues from the “sin tax” on cannabis products.

  When it comes to legal substances whose consumption may cause public harm or costs, it is an accepted principle that societal costs should be covered, at least in part, by revenue generated from a “sin tax” levied on the sale of those substances. This has long been the practice with alcohol and tobacco, for example.

  In similar fashion, once cannabis is legalized, an excise tax will be levied on the sale of cannabis products, with the revenues shared among Canada’s governments to offset at least some of the costs they incur in dealing with the consequences of cannabis use.

• It is uncertain how the legalization of cannabis will change what governments spend to deal with the consequences of cannabis use…

  Cannabis is already creating substantial direct and mostly open-ended costs for governments.

  Cannabis-use disorders lead to acute care hospitalizations and are an extremely common reason for admission into addiction treatment programs. Research indicates that motor vehicle accidents attributable to cannabis-impaired driving are surprisingly prevalent. The enforcement, prosecution and incarceration of cannabis-related offences under the Controlled Drugs and Substances Act are also a significant draw on public resources.

  There is a lot of uncertainty about how exactly legalization will affect these open-ended costs. Enforcement, prosecution and incarceration costs, for example, should be considerably reduced. But health-related costs, to take another example, could rise due to more widespread use. The exact extent of these changes is impossible to predict.

  The way cannabis-related tax revenues are shared between levels of government should reflect the uncertainty about the costs incurred by each level of government.

  The biggest downside risk comes from cannabis-impaired driving, which studies suggest may already be approaching the same level as alcohol-impaired driving. While this behaviour is not currently a major strain on criminal justice resources, improvements in roadside-testing tools and criminal prosecution practices, likely to emerge post-legalization, could mean more cannabis-impaired drivers are caught than currently are.

• …But it is likely that the bulk of the risk of cost increases will be borne by provincial/territorial and municipal governments.

  For the most part, policing costs are born by municipal governments. They will therefore benefit from reduced enforcement costs, but will also shoulder the bulk of the significant risk of cannabis-impaired driving.

  Health care costs are primarily born by provincial governments, though some of those costs are paid by the federal government through fiscal transfers. Therefore, the inherent risk of health care cost increases is shouldered by provincial governments fully and directly, and the federal government partially and indirectly.

• The current revenue-sharing formula reflects known current realities with some allowance for risk, but is not designed to deal with uncertainty and is only a temporary solution anyway.

  Following legalization, 75 per cent of the revenues from the cannabis excise tax will go to provincial governments (who will in turn pass some of it to municipalities). The federal government will receive 25 per cent, up to $100 million, with the overage also going to the provinces. This formula will be reviewed after two years.

  This formula closely mirrors the pre-legalization 70-30 split in direct costs, with the extra 5 per cent for the provinces providing some allowance for the extra risk they incur. However, two years will likely not be enough to get a clear picture of how costs and risks will be split among Canada’s governments over the long-term. And the current formula itself needs flexibility to adjust to changes in how costs and risks are split between governments in Canada.

• The way cannabis-related tax revenues are shared between levels of government should reflect the uncertainty about the costs incurred by each level of government.

  To address this uncertainty regarding costs and risk, the revenue-sharing formula should be flexible and dynamic. At least for the first decade after legalization, the revenue-sharing mechanism should be subject to ongoing reassessment cycles tied to estimates of which governments bear the costs of cannabis. Negotiations to create this mechanism should start sooner rather than later if it is to be put in place shortly after the initial two-year cycle ends.