NZIER: Cannabis prohibition in New Zealand has failed, regulation to generate $490m in tax revenue

New Zealand Institute for Economic Reserach (NZIER) have published a new report, showing cannabis prohibition has failed and regulation would generate $490m in tax revenue for New Zealand.


NZIER is a specialist organisation that uses applied economic research and analysis to provide a wide range of strategic advice. The organisation undertakes, and make freely available, economic research aimed at promoting a better understanding of New Zealand’s important economic challenges.

Established in 1958, NZIER prides itself on a reputation for independence and delivering quality analysis in the right form and at the right time.

Key points

A referendum this year will ask the public whether they support legalising the use of cannabis, accompanied by regulation, education and taxation.

We recommended a similar approach in 2016, after concluding that prohibition of cannabis in New Zealand has been an expensive and failed attempt to reduce harm or use.

To aid public debate on this issue, we have revisited our 2016 work, updated the overseas evidence and assessed the Government’s proposal.

The Government’s objectives

The Government’s proposed legalised cannabis regime has two objectives:

  • to minimise the harms associated with use

  • to reduce overall use over time.

This approach does not see all use as harmful.

The proposed regulatory regime

The Government is proposing a specific form of market regulation, based on limited consultation.

It has specifically decided that its aim is to limit the development of a commercial market and wants to see the size of the market shrink through time.

The Government plans to limit the size of the commercial cannabis market and see it shrink.

A new regulatory body will have statutory objectives of:

  • promoting the wellbeing of New Zealanders

  • reducing the harms of cannabis use

  • lowering the overall use of cannabis over time.

The Authority will be required to publish a national plan to meet the objectives of the Act and report against its delivery annually.

Overseas experience

Legalisation in overseas countries has proceeded down different paths:

Uruguay has allowed limited commercial activity, while permitting personal growing and growing clubs:

  • Regulated prices in Uruguay are low The has been limited public support for reforms

  • Pharmacists have been slow to take up the opportunity to sell cannabis to registered users

  • The illicit market has continued to supply most users.

Canada legalised cannabis at the federal level but left it to the Provinces and Territories to regulate the market.

  • A wide range of approaches to the market have been applied, with government-owned entities selling at the wholesale level and on-line

  • The establishment of retail stores has been slow, but now 45% of Canadians live within 10 kms of a store

  • In the year after legalisation, the number of moderate to low users increased by 2%, but the proportion of heavy users stayed about the same, while somewhat surprisingly, use by those below the legal age may have fallen significantly.

States in the United States have followed a more laissez-faire approach to regulation.

We have good data from the State of Colorado of what has happened post-legalisation, due to the State legislature requiring regular monitoring and reporting:

  • Use is heavily concentrated in those using daily or near daily: 21% of users are in this group, but they consume over 70% of the cannabis sold.

  • Use by youth under the legal age may also have fallen, suggesting that the taboo nature of cannabis might be a motivation for use and that under-age users find it more difficult to buy from licit suppliers.

  • Total use increased steadily after legalisation, but may have plateaued.

  • Prices in the legal market fell significantly, despite the imposition of new state taxes.

  • The illicit market seems to have been absorbed into legal market, at least for in-state sales.

In California, the high cost of complying with regulations not specifically targeted at cannabis, like state water and environmental rules has seen a limited conversion of illicit growing to the legal market.

Legalisation can displace the illegal market for cannabis.

The economics of cannabis growing

In order to hide production and boost growth, many illegal growers operate small scale, in-door hydroponic facilities, that have high per-unit costs and can have a high carbon footprint, or operate in remote locations, incurring high transport costs (and emitting greenhouse gases in the processes).

Outdoor growing, using natural light and rain, can have a lower carbon footprint, but can still cause environmental damage.

One of the expected economic benefits of legalisation is that low-cost, high-volume growing can become possible. Encouraging this sort of operation is a key objective of the Canadian Government, as it wanted legalisation to drive-out criminal involvement in cannabis growing, distribution and sale. Uruguay also wanted to remove criminals from the cannabis market.

Taxing cannabis could raise $490 million in revenue a year.

We estimate that a 25% tax on cannabis, plus GST, could raise about $490 million per year in annual revenue, once several expected changes to the market happen. If the Government succeeds in reducing use through time, this tax take will also fall.

The Government faces a dilemma:

  • Legalisation should eliminate the premium price that illegal suppliers can change, thus reducing prices and increasing demand.

  • Commercial operators will have an incentive and the ability to reduce costs, which if passed on to consumers will also increase demand, while also reducing the tax take (depending on the type of tax imposed).

  • Taxation could be used to increase prices, as is the case with tobacco, but this may see more home-growing and a return to the illicit market, thus removing some of the main benefits of legalisation.

There has been limited public debate or discussion of these economic effects

The limited consultation on the Bill, especially the lack of a Select Committee process, means that the public are not being given an opportunity to debate the mechanics of legalisation or suggest alternative regulatory approaches.

If the Government has conducted detailed analysis of the economic effects of its detailed proposals, it has not yet made it public and there will again be a limited opportunity to digest those findings and make any adjustments.

The overseas experience suggests that unintended consequences are common. Therefore, it will be important to have good monitoring and review processes if the new regime is to stay aligned to the policy objectives.

Read the full report

You can read a full copy of the New Zealand Institute of Economic Research's report, New Zealand's Cannabis Referendum 2020, here.

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