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The Effect of Cannabis Legalization on Substance Demand and Tax Revenues

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  • 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.

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  • 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
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    4. 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).
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