IDEAS home Printed from https://ideas.repec.org/a/ntj/journl/v73y2020i2p511-544.html
   My bibliography  Save this article

Taxing the Potency of Sin Goods: Evidence from Recreational Cannabis and Liquor Markets

Author

Listed:
  • Benjamin Hansen
  • Keaton Miller
  • Boyoung Seo
  • Caroline Weber

Abstract

Cannabis is legal to purchase for over 28 percent of U.S. citizens. A central argument used in public campaigns for cannabis legalization has focused on the tax revenue that legal cannabis markets could generate. Recently, some policy makers and politicians have debated switching from traditional ad valorem taxes to taxes on potency, aiming to reduce the potential externalities associated with highly potent products. In this paper, we construct a theoretical model to predict the implications of a potency-based tax in an environment with market power. We then estimate the demand for cannabis potency based on administrative records of sales and potency from Washington state. We finish by conducting counterfactual analyses comparing revenue and potency outcomes from potency-based taxes versus the traditional price-based taxes.

Suggested Citation

  • Benjamin Hansen & Keaton Miller & Boyoung Seo & Caroline Weber, 2020. "Taxing the Potency of Sin Goods: Evidence from Recreational Cannabis and Liquor Markets," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(2), pages 511-544, June.
    • Handle: RePEc:ntj:journl:v:73:y:2020:i:2:p:511-544
    DOI: 10.17310/ntj.2020.2.07
    as

    Download full text from publisher

    File URL: https://doi.org/10.17310/ntj.2020.2.07
    Download Restriction: Access is restricted to subscribers and members of the National Tax Association.
    File URL: https://libkey.io/10.17310/ntj.2020.2.07?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    2. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    3. Benjamin Hansen & Keaton Miller & Caroline Weber, 2020. "Early Evidence On Recreational Marijuana Legalization And Traffic Fatalities," Economic Inquiry, Western Economic Association International, vol. 58(2), pages 547-568, April.
    4. Combris, Pierre & Lecocq, Sebastien & Visser, Michael, 1997. "Estimation for a Hedonic Price Equation for Bordeaux Wine: Does Quality Matter?," Economic Journal, Royal Economic Society, vol. 107(441), pages 390-402, March.
    5. Philip J. Cook & Jan Ostermann & Frank A. Sloan, 2005. "The Net Effect of an Alcohol Tax Increase on Death Rates in Middle Age," American Economic Review, American Economic Association, vol. 95(2), pages 278-281, May.
    6. Brett Hollenbeck & Kosuke Uetake, 2021. "Taxation and market power in the legal marijuana industry," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 559-595, September.
    7. Cordes, Joseph J. & Nicholson, Eric & Sammartino, Frank, 1990. "Raising Revenue by Taxing Activities with Social Costs," National Tax Journal, National Tax Association, vol. 43(3), pages 343-56, September.
    8. Philip J. Cook & George Tauchen, 1982. "The Effect of Liquor Taxes on Heavy Drinking," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 379-390, Autumn.
    9. Griffith, Rachel & O’Connell, Martin & Smith, Kate, 2019. "Tax design in the alcohol market," Journal of Public Economics, Elsevier, vol. 172(C), pages 20-35.
    10. Stefano DellaVigna & Matthew Gentzkow, 2019. "Uniform Pricing in U.S. Retail Chains," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(4), pages 2011-2084.
    11. Sergio Correia, 2014. "REGHDFE: Stata module to perform linear or instrumental-variable regression absorbing any number of high-dimensional fixed effects," Statistical Software Components S457874, Boston College Department of Economics, revised 21 Aug 2023.
    12. Cordes, Joseph J. & Nicholson, Eric & Sammartino, Frank, 1990. "Raising Revenue by Taxing Activities With Social Costs," National Tax Journal, National Tax Association;National Tax Journal, vol. 43(3), pages 343-356, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brett Hollenbeck & Kosuke Uetake, 2021. "Taxation and market power in the legal marijuana industry," RAND Journal of Economics, RAND Corporation, vol. 52(3), pages 559-595, September.
    2. Brett Hollenbeck & Renato Zaterka Giroldo, 2022. "Winning Big: Scale and Success in Retail Entrepreneurship," Marketing Science, INFORMS, vol. 41(2), pages 271-293, March.
    3. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2020. "Federalism, partial prohibition, and cross-border sales: Evidence from recreational marijuana," Journal of Public Economics, Elsevier, vol. 187(C).
    4. Hansen, Benjamin & Miller, Keaton & Weber, Caroline, 2022. "Vertical integration and production inefficiency in the presence of a gross receipts tax," Journal of Public Economics, Elsevier, vol. 212(C).
    5. Paul Calcott & Vladimir Petkov, 2023. "Choosing between imperfect proxies for a corrective tax," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(2), pages 245-275, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Louis Kaplow, 2010. "Optimal Control of Externalities in the Presence of Income Taxation," STICERD - Public Economics Programme Discussion Papers 02, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    2. Christopher Carpenter & Carlos Dobkin, 2010. "Alcohol Regulation and Crime," NBER Chapters, in: Controlling Crime: Strategies and Tradeoffs, pages 291-329, National Bureau of Economic Research, Inc.
    3. Sandra L. Decker & Amy Ellen Schwartz, 2000. "Cigarettes and Alcohol: Substitutes or Complements?," NBER Working Papers 7535, National Bureau of Economic Research, Inc.
    4. Keaton Miller & Boyoung Seo, 2021. "The Effect of Cannabis Legalization on Substance Demand and Tax Revenues," National Tax Journal, University of Chicago Press, vol. 74(1), pages 107-145.
    5. James, Simon & Alley, Clinton, 2002. "Tax compliance, self-assessment and tax administration," MPRA Paper 26906, University Library of Munich, Germany.
    6. Dubois, Pierre & Abi Rafeh, Rossi & Griffith, Rachel & O'Connell, Martin, 2023. "The Effects of Sin Taxes and Advertising Restrictions in a Dynamic Equilibrium," TSE Working Papers 23-1480, Toulouse School of Economics (TSE), revised Feb 2024.
    7. Simon James, 1999. "The future international tax environment and European tax harmonization: a personal view," European Accounting Review, Taylor & Francis Journals, vol. 8(4), pages 731-747.
    8. James Fogarty, 2010. "The Demand For Beer, Wine And Spirits: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 24(3), pages 428-478, July.
    9. Louis Kaplow, 1993. "Should the Government's Allocation Branch be Concerned about the Distortionary Cost of Taxation and Distributive Effects?," NBER Working Papers 4566, National Bureau of Economic Research, Inc.
    10. Louis Kaplow, 2004. "On the (Ir)Relevence of Distribution and Labor Supply Distortion of Government Policy," NBER Working Papers 10490, National Bureau of Economic Research, Inc.
    11. James M. Poterba, 1991. "Is the Gasoline Tax Regressive?," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 145-164, National Bureau of Economic Research, Inc.
    12. Clements, Kenneth W. & Mariano, Marc Jim M. & Verikios, George & Wong, Berwyn, 2022. "How elastic is alcohol consumption?," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 568-581.
    13. Adam N. Smith & Jim E. Griffin, 2023. "Shrinkage priors for high-dimensional demand estimation," Quantitative Marketing and Economics (QME), Springer, vol. 21(1), pages 95-146, March.
    14. By Louis Kaplow, 2012. "Optimal Control Of Externalities In The Presence Of Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 487-509, May.
    15. Martin O'Connell & Pierre Dubois & Rachel Griffith, 2022. "The Use of Scanner Data for Economics Research," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 723-745, August.
    16. Brazell, David W. & Gerardi, Geraldine, 1994. "Issues in Financing the Superfund," National Tax Journal, National Tax Association;National Tax Journal, vol. 47(3), pages 677-688, September.
    17. Bryan Bollinger & Steven E. Sexton, 2023. "Local excise taxes, sticky prices, and spillovers: evidence from Berkeley’s soda tax," Quantitative Marketing and Economics (QME), Springer, vol. 21(2), pages 281-331, June.
    18. Hindriks, Jean & Serse, Valerio, 2019. "Heterogeneity in the tax pass-through to spirit retail prices: Evidence from Belgium," Journal of Public Economics, Elsevier, vol. 176(C), pages 142-160.
    19. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 133-151, Winter.
    20. Jessie Handbury, 2021. "Are Poor Cities Cheap for Everyone? Non‐Homotheticity and the Cost of Living Across U.S. Cities," Econometrica, Econometric Society, vol. 89(6), pages 2679-2715, November.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ntj:journl:v:73:y:2020:i:2:p:511-544. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: The University of Chicago Press (email available below). General contact details of provider: https://www.ntanet.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.