The background

Today the Lib Dems issued a report compiled by a panel of experts saying cannabis should be regulated in Britain.

The point of the report wasn’t to claim it would be a money spinner for the government. It would raise some money, but more importantly, the report said, it would bring health benefits and reduce the social cost, with less criminality such as convictions for drugs possession and so on.

But big figures – such as the £1bn the report said could be raised in taxes – caught FactCheck’s eye.

Are we burning a hole in our pockets by making cannabis use illegal?

The analysis

In their report, they say “depending on how legal markets develop, and the taxation regimes adopted”, regulating cannabis could bring in taxes worth £500m to £1bn a year.

How do they work this out?

Well, they didn’t quite say. But they did explain the principles behind it and point us towards a previous report from 2013, by the Institute of Social & Economic Research, that went into more detail.

The idea is this: cannabis would be taxed in the same way that tobacco and alcohol is taxed, and wouldn’t include any “edibles” – hash cakes, brownies or toast, for example.

Taxes on cannabis would be about 70 per cent of retail price (compared with 83 per cent on cigarettes in 2013 and 72 per cent on high strength beer).

At best, the report suggested, the government could expect to pick up £768m* a year in tax revenue. This would be if people began to want a lot of low-grade (low THC, or tetrahydrocannabinol, which brings about the high) marijuana.

At least, the government could get something like £541m a year in taxes. This assumes a lot of people want very high grade cannabis, therefore driving up prices, and potentially lowering the quantity that people are prepared to legally buy, the report said.

When this report came out, the Treasury was rather critical of it. George Osborne’s department accepted the ISER’s figures, but said that because they had only included a limit of about 10 per cent strength THC, stronger marijuana, such as so-called “skunk”, would be excluded. So unless the government is prepared to undercut the skunk market, most buyers would turn to the black market, and tax revenues would end up falling.

The Lib Dems’ report takes a slightly different approach, however, and says that it may consider graded tax levels, dependent on strength. Like with beers.

They say that THC content could vary from 5 to 10 to 15 per cent – and therefore include some forms of “skunk”. In which case, it’s assumed that fewer people would turn to the black market.

Norman Lamb MP, who introduced the report (Image: Getty)

When we spoke to Steve Rolles, senior policy analyst with the Reform Drug Policy Foundation who chaired the panel, he conceded that the report’s estimate of £500m to £1bn was slightly higher than what the ISER had predicted. But he pointed out that he and the panel also took other potential revenue streams into consideration: the money which could be earned from license fees, and tax revenues from wages and salaries from people working within the industry.

Again, no further breakdown was available. Which isn’t that surprising, given it’s a hypothetical scenario on an illegal trade which is notoriously difficult to quantify. How could we know how much a worker on a marijuana farm should earn at this stage?

Lots of other things come into play which could affect tax revenues: we don’t know exactly how much could be saved or spent on the social costs, or on justice costs, or even whether regulating cannabis affects alcohol and tobacco consumption.

But in a sense, there’s a bigger problem over whether the figures add up or not.

Taxes are high to try and reduce demand. Demand goes down, which means that either taxes will need to rise in order to provide the same revenue stream, or ultimately, the government’s tax revenues will start to fall. Bringing anything into the tax regime has its own contradiction at its centre.

And this is what’s happened with tobacco. Since 1980, tobacco duty receipts have gone up, from about £2.5bn in 1980-81, to just under £10bn in 2014-15.

That’s a rise in nominal – cash – terms, but as a proportion of GDP, it’s fallen from a peak of about 1.25 per cent in 1981-82, to just over 0.5 per cent in 2014-15.

Source: HMRC Tax & National Insurance Contribution receipts, August 2015

The verdict

By Mr Rolles’ own admission, the figures contained in the Lib Dem report are “speculative”. Indeed, they did suggest that their figures were a prediction to begin with, depended on the tax regime, and were a by-product of their central argument that regulating cannabis would be more harmless than the current system.

But they’re not alone in suggesting that regulating cannabis would bring in plenty of money for state coffers. It’s been suggested many times before.

It probably would to begin with, but after a while, as a proportion of GDP, the country would be likely to make less and less from it.

It’s also very hard to quantify the cost of something that’s still illegal.

*UPDATE:

As we make clear above, we used a working tax rate of 70 per cent, because the ISER said in their report: “Our reform scenarios assume a licensed product limited to 10% THC content…The tax rate on licensed cannabis would be around 70%.” The figure of £768m as the highest tax take referred to comes from this. Thanks to Steve Rolles, of Transform, who has since pointed out that the report does also give figures for an upper tax rate of 79 per cent (with the same THC content), which would yield tax revenue of £871m, and a lower tax rate of 51 per cent, which, if there were low demand, would yield £397m.