Tax Revenues When Substances Substitute: Marijuana, Alcohol, and Tobacco
48 Pages Posted: 25 Mar 2018 Last revised: 9 Jan 2019
Date Written: March 24, 2018
Marijuana advocates argue legalization will increase tax revenues. If legal substances are substitutes, marijuana revenues may crowd out other taxes. We study tax revenues around Washington’s legalization of marijuana using detailed administrative and scanner data. We estimate a flexible demand system for marijuana, alcohol, and tobacco and control for prices. We find legalizing marijuana leads to a 5% decrease in alcohol demand and a 12% decrease in tobacco demand. Liquor and cigarettes are most affected. 40\% of state marijuana tax revenue is offset by reductions elsewhere. A 1% increase in Washington’s marijuana tax, currently the highest nationwide, increases revenue 0.2%.
Keywords: Marijuana, Recreational Substances, Substitution, Demand Estimation, Taxation, Industrial Organization
JEL Classification: H20, L65, L66, L00
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