The Effect of Cannabis Legalization on Substance Demand and Tax Revenues

National Tax Journal (2021), 74:1, 107-145

45 Pages Posted: 25 Mar 2018 Last revised: 19 Jan 2023

See all articles by Keaton Miller

Keaton Miller

University of Oregon

Boyoung Seo

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: August 1, 2020

Abstract

Cannabis advocates argue 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% decrease in alcohol, mainly by liquor and wine, and 5% decrease in cigarettes demand. Approximately 40% of Washington’s 2015 cannabis revenue was cannibalized from pre-existing sources. We find that Washington’s current substance taxes, even after accounting for substitution, are on the upward-sloping side of the Laffer curve.

Keywords: Cannabis, Recreational Substances, Substitution, Taxation, Demand Estimation, Public Finance, Industrial Organization

JEL Classification: H20, H71, H77, L65, L66

Suggested Citation

Miller, Keaton and Seo, Boyoung, The Effect of Cannabis Legalization on Substance Demand and Tax Revenues (August 1, 2020). National Tax Journal (2021), 74:1, 107-145, Available at SSRN: https://ssrn.com/abstract=3148773 or http://dx.doi.org/10.2139/ssrn.3148773

Keaton Miller

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Boyoung Seo (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-3667 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
558
Abstract Views
2,658
Rank
90,781
PlumX Metrics