IDEAS home Printed from https://ideas.repec.org/a/ucp/nattax/doi10.1086-712915.html
   My bibliography  Save this article

The Effect of Cannabis Legalization on Substance Demand and Tax Revenues

Author

Listed:
  • Keaton Miller
  • Boyoung Seo

Abstract

Cannabis advocates argue that legalization will increase tax revenues. However, if legal substances are substitutes, cannabis revenues may cannibalize other taxes. We document substitution between legal cannabis products and alcohol and tobacco products using detailed administrative and scanner data from Washington State. We estimate a flexible demand system for legal substances and find legalizing cannabis leads to a 15 percent decrease in alcohol, mainly by liquor and wine, and 5 percent decrease in cigarette demand. Approximately 40 percent of Washington’s 2015 cannabis revenue was cannibalized from preexisting sources. We find that Washington’s current substance taxes, even after accounting for substitution, are on the upward-sloping side of the Laffer curve.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:nattax:doi:10.1086/712915
    DOI: 10.1086/712915
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/712915
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/712915
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/712915?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. Jan Jacobs & Jenny Ligthart & Hendrik Vrijburg, 2010. "Consumption tax competition among governments: Evidence from the United States," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(3), pages 271-294, June.
    2. Christian Broda & David E. Weinstein, 2006. "Globalization and the Gains From Variety," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(2), pages 541-585.
    3. Persson, Torsten, 1998. "Economic Policy and Special Interest Politics," Economic Journal, Royal Economic Society, vol. 108(447), pages 310-327, March.
    4. Matthew Harding & Ephraim Leibtag & Michael F. Lovenheim, 2012. "The Heterogeneous Geographic and Socioeconomic Incidence of Cigarette Taxes: Evidence from Nielsen Homescan Data," American Economic Journal: Economic Policy, American Economic Association, vol. 4(4), pages 169-198, November.
    5. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    6. repec:adr:anecst:y:1994:i:34:p:06 is not listed on IDEAS
    7. repec:bla:jindec:v:50:y:2002:i:3:p:237-63 is not listed on IDEAS
    8. Steven Berry & Philip Haile, 2016. "Identification in Differentiated Products Markets," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 27-52, October.
    9. Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
    10. Liran Einav & Dan Knoepfle & Jonathan Levin & Neel Sundaresan, 2014. "Sales Taxes and Internet Commerce," American Economic Review, American Economic Association, vol. 104(1), pages 1-26, January.
    11. Liana Jacobi & Michelle Sovinsky, 2016. "Marijuana on Main Street? Estimating Demand in Markets with Limited Access," American Economic Review, American Economic Association, vol. 106(8), pages 2009-2045, August.
    12. Miller, Nathan H. & Remer, Marc & Ryan, Conor & Sheu, Gloria, 2017. "Upward pricing pressure as a predictor of merger price effects," International Journal of Industrial Organization, Elsevier, vol. 52(C), pages 216-247.
    13. 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.
    14. 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).
    15. Lovenheim, Michael F., 2008. "How Far to the Border?: The Extent and Impact of Cross-Border Casual Cigarette Smuggling," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(1), pages 7-33, March.
    16. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248, National Bureau of Economic Research, Inc.
    17. Dora Gicheva & Justine Hastings & Sofia Villas-Boas, 2010. "Investigating Income Effects in Scanner Data: Do Gasoline Prices Affect Grocery Purchases?," American Economic Review, American Economic Association, vol. 100(2), pages 480-484, May.
    18. David Agrawal, 2012. "Games within borders: are geographically differentiated taxes optimal?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(4), pages 574-597, August.
    19. Brulhart, Marius & Jametti, Mario, 2006. "Vertical versus horizontal tax externalities: An empirical test," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2027-2062, November.
    20. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 35(4), pages 615-645, November.
    21. Nathan H. Miller & Matthew C. Weinberg, 2017. "Understanding the Price Effects of the MillerCoors Joint Venture," Econometrica, Econometric Society, vol. 85(6), pages 1763-1791, November.
    22. Kroszner, Randall S & Stratmann, Thomas, 1998. "Interest-Group Competition and the Organization of Congress: Theory and Evidence from Financial Services' Political Action Committees," American Economic Review, American Economic Association, vol. 88(5), pages 1163-1187, December.
    23. Moe, Terry M., 1985. "Control and Feedback in Economic Regulation: The Case of the NLRB," American Political Science Review, Cambridge University Press, vol. 79(4), pages 1094-1116, December.
    24. Andrew Goodman-Bacon, 2018. "Difference-in-Differences with Variation in Treatment Timing," NBER Working Papers 25018, National Bureau of Economic Research, Inc.
    25. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
    26. Inman, Robert P. & Rubinfeld, Daniel L., 1996. "Designing tax policy in federalist economies: An overview," Journal of Public Economics, Elsevier, vol. 60(3), pages 307-334, June.
    27. Benjamin Hansen & Keaton Miller & Caroline Weber, 2017. "Getting into the Weeds of Tax Invariance," NBER Working Papers 23632, National Bureau of Economic Research, Inc.
    28. David Merriman, 2010. "The Micro-geography of Tax Avoidance: Evidence from Littered Cigarette Packs in Chicago," American Economic Journal: Economic Policy, American Economic Association, vol. 2(2), pages 61-84, May.
    29. DeCicca, Philip & Kenkel, Donald & Liu, Feng, 2013. "Excise tax avoidance: The case of state cigarette taxes," Journal of Health Economics, Elsevier, vol. 32(6), pages 1130-1141.
    30. Patrick Bajari & Denis Nekipelov & Stephen P. Ryan & Miaoyu Yang, 2015. "Machine Learning Methods for Demand Estimation," American Economic Review, American Economic Association, vol. 105(5), pages 481-485, May.
    31. Walter Y. Oi, 1996. "The Welfare Implications of Invention," NBER Chapters, in: The Economics of New Goods, pages 109-142, National Bureau of Economic Research, Inc.
    32. Jeff DeSimone & Matthew C. Farrelly, 2003. "Price and Enforcement Effects on Cocaine and Marijuana Demand," Economic Inquiry, Western Economic Association International, vol. 41(1), pages 98-115, January.
    33. Nelson, D.E. & Mowery, P. & Asman, K. & Pederson, L.L. & O'Malley, P.M. & Malarcher, A. & Maibach, E.W. & Pechacek, T.F., 2008. "Long-term trends in adolescent and young adult smoking in the United States: Metapatterns and implications," American Journal of Public Health, American Public Health Association, vol. 98(5), pages 905-915.
    34. Dragone, Davide & Prarolo, Giovanni & Vanin, Paolo & Zanella, Giulio, 2019. "Crime and the legalization of recreational marijuana," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 488-501.
    35. Matthew Gentzkow, 2007. "Valuing New Goods in a Model with Complementarity: Online Newspapers," American Economic Review, American Economic Association, vol. 97(3), pages 713-744, June.
    36. Farasat A. S. Bokhari & Gary M. Fournier, 2013. "Entry in the ADHD drugs market: Welfare impact of generics and me-too's," Journal of Industrial Economics, Wiley Blackwell, vol. 61(2), pages 339-392, June.
    37. Dhar, Tirtha & Chavas, Jean- Paul & Cotterill, Ronald W. & Gould, Brian W., 2005. "An Economic Analysis of Brand-Level Strategic Pricing Between Coca-Cola Company and Pepsi," Working Papers 201538, University of Wisconsin-Madison, Department of Agricultural and Applied Economics, Food System Research Group.
    38. Eugenio J. Miravete & Katja Seim & Jeff Thurk, 2018. "Market Power and the Laffer Curve," Econometrica, Econometric Society, vol. 86(5), pages 1651-1687, September.
    39. Ambarish Chandra & Keith Head & Mariano Tappata, 2014. "The Economics of Cross-Border Travel," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 648-661, October.
    40. Devereux, M.P. & Lockwood, B. & Redoano, M., 2007. "Horizontal and vertical indirect tax competition: Theory and some evidence from the USA," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 451-479, April.
    41. David R. Agrawal, 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 1-29, May.
    42. Donald S. Kenkel, 2005. "Are Alcohol Tax Hikes Fully Passed Through to Prices? Evidence from Alaska," American Economic Review, American Economic Association, vol. 95(2), pages 273-277, May.
    43. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
    44. Wallace E. Oates & Wallace E. Oates, 2004. "An Essay on Fiscal Federalism," Chapters, in: Environmental Policy and Fiscal Federalism, chapter 22, pages 384-414, Edward Elgar Publishing.
    45. 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.
    46. Tirtha Dhar & Jean‐Paul Chavas & Ronald W. Cotterill & Brian W. Gould, 2005. "An Econometric Analysis of Brand‐Level Strategic Pricing Between Coca‐Cola Company and PepsiCo," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 14(4), pages 905-931, December.
    47. Jerry A Hausman & Gregory K Leonard, 2002. "The Competitive Effects of a New Product Introduction: A Case Study," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 237-263, September.
    48. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
    49. Fredriksson, Per G. & Mamun, Khawaja A., 2008. "Vertical externalities in cigarette taxation: Do tax revenues go up in smoke?," Journal of Urban Economics, Elsevier, vol. 64(1), pages 35-48, July.
    50. Olmstead, Todd A. & Alessi, Sheila M. & Kline, Brendan & Pacula, Rosalie Liccardo & Petry, Nancy M., 2015. "The price elasticity of demand for heroin: Matched longitudinal and experimental evidence," Journal of Health Economics, Elsevier, vol. 41(C), pages 59-71.
    51. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    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. Thanh Lu, 2021. "Marijuana legalization and household spending on food and alcohol," Health Economics, John Wiley & Sons, Ltd., vol. 30(7), pages 1684-1696, July.
    2. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2024. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," CRC TR 224 Discussion Paper Series crctr224_2024_501, University of Bonn and University of Mannheim, Germany.
    3. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2023. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," Rationality and Competition Discussion Paper Series 487, CRC TRR 190 Rationality and Competition.
    4. Armstrong, Michael J., 2023. "Relationships between sales of legal medical cannabis and alcohol in Canada," Health Policy, Elsevier, vol. 128(C), pages 28-33.
    5. Mir M. Ali & Chandler McClellan & Ryan Mutter & Daniel I. Rees, 2023. "Recreational marijuana laws and the misuse of prescription opioids: Evidence from National Survey on Drug Use and Health microdata," Health Economics, John Wiley & Sons, Ltd., vol. 32(2), pages 277-301, February.
    6. Sabia, Joseph J. & Dave, Dhaval & Alotaibi, Fawaz & Rees, Daniel I., 2024. "The effects of recreational marijuana laws on drug use and crime," Journal of Public Economics, Elsevier, vol. 234(C).
    7. Briggs Depew & Jacob Meyer, 2023. "Legal access to alcohol and automobile accidents: Potential interactive effects of alcohol and drug consumption," Contemporary Economic Policy, Western Economic Association International, vol. 41(2), pages 338-353, 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. 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).
    2. Agrawal, David R., 2016. "Local fiscal competition: An application to sales taxation with multiple federations," Journal of Urban Economics, Elsevier, vol. 91(C), pages 122-138.
    3. Bokhari, Farasat A.S. & Mariuzzo, Franco, 2018. "Demand estimation and merger simulations for drugs: Logits v. AIDS," International Journal of Industrial Organization, Elsevier, vol. 61(C), pages 653-685.
    4. Philip G. Gayle & Ying Lin, 2022. "Market effects of new product introduction: Evidence from the brew‐at‐home coffee market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 525-557, August.
    5. Steven T. Berry & Philip A. Haile, 2021. "Foundations of Demand Estimation," Cowles Foundation Discussion Papers 2301, Cowles Foundation for Research in Economics, Yale University.
    6. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2023. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," Rationality and Competition Discussion Paper Series 487, CRC TRR 190 Rationality and Competition.
    7. Agrawal, David R., 2014. "LOST in America: Evidence on local sales taxes from national panel data," Regional Science and Urban Economics, Elsevier, vol. 49(C), pages 147-163.
    8. Muhammad Salar Khan & Paul N. Thompson & Victor J. Tremblay, 2020. "Marijuana tax incidence, stockpiling, and cross-border substitution," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(1), pages 103-127, February.
    9. Michelle Sovinsky & Liana Jacobi & Alessandra Allocca & Tao Sun, 2024. "More than Joints: Multi-Substance Use, Choice Limitations, and Policy Implications," CRC TR 224 Discussion Paper Series crctr224_2024_501, University of Bonn and University of Mannheim, Germany.
    10. David R. Agrawal, 2015. "The Tax Gradient: Spatial Aspects of Fiscal Competition," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 1-29, May.
    11. Victor Aguirregabiria & Margaret Slade, 2017. "Empirical models of firms and industries," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1445-1488, December.
    12. Christos Genakos & Kai‐Uwe Kühn & John Van Reenen, 2018. "Leveraging Monopoly Power by Degrading Interoperability: Theory and Evidence from Computer Markets," Economica, London School of Economics and Political Science, vol. 85(340), pages 873-902, October.
    13. Jerry Hausman, 2002. "Sources of Bias and Solutions to Bias in the CPI," NBER Working Papers 9298, National Bureau of Economic Research, Inc.
    14. Miravete, Eugenio J. & Seim, Katja & Thurk, Jeff, 2023. "Pass-through and tax incidence in differentiated product markets," International Journal of Industrial Organization, Elsevier, vol. 90(C).
    15. Genakos, Christos D., 2004. "Differential merger effects: the case of the personal computer industry," LSE Research Online Documents on Economics 6726, London School of Economics and Political Science, LSE Library.
    16. Richard Friberg & Frode Steen & Simen A. Ulsaker, 2022. "Hump-Shaped Cross-Price Effects and the Extensive Margin in Cross-Border Shopping," American Economic Journal: Microeconomics, American Economic Association, vol. 14(2), pages 408-438, May.
    17. Robert Clark & Yiran Gong, 2021. "Why Do Some New Products Fail? Evidence from the Entry and Exit of Vanilla Coke," Working Paper 1475, Economics Department, Queen's University.
    18. Reingewertz, Yaniv, 2018. "Corporate taxes and vertical tax externalities: Evidence from narrative federal tax shocks," Regional Science and Urban Economics, Elsevier, vol. 68(C), pages 84-97.
    19. Alessandro Bonanno & Carlo Russo & Luisa Menapace, 2018. "Market power and bargaining in agrifood markets: A review of emerging topics and tools," Agribusiness, John Wiley & Sons, Ltd., vol. 34(1), pages 6-23, December.
    20. Diwas KC & TI Tongil Kim & Jiayi Liu, 2022. "Electronic prescription monitoring and the opioid epidemic," Production and Operations Management, Production and Operations Management Society, vol. 31(11), pages 4057-4074, 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:ucp:nattax:doi:10.1086/712915. 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: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/NTJ .

    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.