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

48 Pages Posted: 25 Mar 2018 Last revised: 9 Jan 2019

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

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

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)

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