Tax Revenues When Substances Substitute: Marijuana, Alcohol, and Tobacco

51 Pages Posted: 25 Mar 2018 Last revised: 27 Apr 2018

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: March 24, 2018

Abstract

Proponents of the legalization of recreational marijuana have argued that the policy would result in increased tax revenues for states. However, if legal substances are highly substitutable, tax revenues from marijuana may crowd out pre-existing revenues. We study the change in substance tax revenues caused by legalizing marijuana in Washington state, accounting for potential substitutability and complementarity between marijuana, alcohol, and tobacco. We use a combination of detailed administrative data on retail marijuana and scanner data on alcohol and tobacco sales. By estimating a demand system for legal substances and controlling for prices, we find that substances are substitutes and the legalization of marijuana itself leads to a 12% decrease in alcohol demand and a 20% decrease in tobacco demand. 50% of state marijuana tax revenue is cannibalized by the reduction in alcohol and tobacco taxes. When those industries adjust their prices, only 18% of marijuana tax revenue comes from alcohol and tobacco. Though Washington has the highest marijuana tax rate in the country, a 1% increase in the marijuana tax results in a 1.22% increase in total revenues collected by the state.

Keywords: Marijuana, Recreational Substances, Substitution, Demand Estimation, Taxation, Industrial Organization

JEL Classification: H20, L65, L66, L00

Suggested Citation

Miller, Keaton and Seo, Boyoung, Tax Revenues When Substances Substitute: Marijuana, Alcohol, and Tobacco (March 24, 2018). Kelley School of Business Research Paper No. 18-27. 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)

Register to save articles to
your library

Register

Paper statistics

Downloads
102
rank
247,325
Abstract Views
396
PlumX Metrics