Cannabis Consumption and Taxation in a Legalised Environment

Cannabis is the most widely used illicit ‘drug’ in Australia and worldwide. The long-running legalisation debate gained momentum early in 2016 when the Federal Government passed new laws to pave the way for the use of ‘medicinal cannabis’. Despite both recreational and medical use at present being illegal in Australia, the country ranks among the highest in the world for cannabis use. According to the Australian National Drug Strategy Household Surveys (NDSHS), 13% of Australians aged 14 and above used cannabis in the 12 months prior to the survey, with teenagers and young adults in their twenties making up most of the users. Over 40% reported having used it at some point in the past.


In the current ‘black market’ environment, it is difficult to predict the effects of legalising cannabis for recreational use. Research, the first of its kind in the world, is using economic modelling to shed some light on the implications of a legal cannabis market. What is clear is that the ‘drug’ market, like any other, is one of supply and demand, with demand depending on price, quality and such demographic factors as age and gender. However, unlike a product such as milk, it cannot be bought in the local supermarket. Only about 50% of the NDSHS respondents reported having ready access to cannabis and, of those, only a quarter said they ended up using the herb. Therefore, not everyone with access necessarily uses. Those who are eager to use are more likely to know how to get it. Illegality was deemed a serious hurdle by 16% of the respondents who said it was the main reason for not using cannabis.


Legalisation would make cannabis widely available to be bought like other legal drugs, such as alcohol. Currently cannabis is only available on the black market and from dealers who also often supply more harmful illegal drugs. Suppliers face potentially heavy criminal penalties including prison if caught. And while many states in Australia have decriminalised use to some degree, users still face penalties and possibly a criminal record when caught with a small amount of cannabis for personal use — something that can have a significant impact on a person’s ability to function in Australian society. For example, it may be more difficult to get a job, secure a rental property, or secure a loan. The fear of legal consequences lowers the use in all age groups in the current environment.

Findings indicate that while legalisation would increase cannabis use, it would not turn the country into a nation of ‘potheads’ (a prohibitionist term, discriminatory at best and way past its use-by date). Overall use would increase from 13-19% in the Australian population aged 14 and older if prices remain unchanged along with higher projected use among people who now have access to illegal cannabis than those who don’t.  While use increases among all age groups, the highest increase would be among people in their thirties and older. The smallest relative increase would be among teenagers and young adults, as these groups have the highest access before legalisation.

Marijuana graph

Predictions for Australia deem a minimum of between AU$70 million and AU$220 million in taxes could be raised (or far more depending on the tax scheme employed and demand) that could be used, for example, to fund education or other social programs. Legalisation of cannabis in Colorado has provided a unique experiment to benchmark predictions. For a state the size of Colorado, tax revenues of $68.2 million annually are predicted — assuming a tax rate of 25%, reduces to $61.5 million a year, allowing for losses to the black market. Colorado’s tax office reported it collected $56.1 million in taxes from the sale of cannabis (excluding medical) in 2014, most of which is being used for school construction and state programs (including those for the homeless). With Australia’s population well over four times the size of Colorado’s 5.4 million, we would expect to raise taxes well in excess of AU$250 million.

medicianl-cannibasLegalisation would provide a safe-sale environment with no judicial risks. However, it would require restricted use for under-age individuals similar to alcohol and cigarettes. Whether this would encourage higher numbers of teenagers and young adults to seek supply from alternative sources is yet to be seen. Unfortunately, taxes and higher prices are only a very limited tool to curb use after legalisation. Research shows only a very moderate response to higher prices. Even with restrictions on access for under-age users after legalisation, the average price per gram of cannabis would have to increase four-fold to keep use as low as before legalisation in this vulnerable age group. Such an increase is not feasible as most users would resort to the black market. By combining a new economic framework that takes into account the role of restricted access to cannabis and the impact of illegal behaviour on the decision to use cannabis, answers have been provided to some of the questions fuelling legalisation debates in Australia and globally — answers that are essential for informed debate and the formulation of effective policy discussion and implementation.

Adapted from Marijuana on Main Street by Liana Jacobi, Faculty of Business and Economics, Melbourne University

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