Marijuana tax incidence, stockpiling, and cross-border substitution

While the number of legalized recreational marijuana markets continues to grow in the USA, state and local governments are still determining how best to levy taxes on marijuana receipts in the face of consumer behavioral responses, such as stockpiling behavior and cross-border purchasing. Using the...

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Bibliographic Details
Published in:International tax and public finance 2020-02, Vol.27 (1), p.103-127
Main Authors: Khan, Muhammad Salar, Thompson, Paul N., Tremblay, Victor J.
Format: Article
Language:English
Subjects:
Behavioral responses
Borders
Business Taxation/Tax Law
Consumer behavior
Consumers
Cross border transactions
Discontinuity
Economic models
Economics
Economics and Finance
Falls
Local government
Marijuana
Markets
Prices
Public Finance
Purchasing
Stockpiling
Supply & demand
Tax increases
Taxation
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Summary:While the number of legalized recreational marijuana markets continues to grow in the USA, state and local governments are still determining how best to levy taxes on marijuana receipts in the face of consumer behavioral responses, such as stockpiling behavior and cross-border purchasing. Using the introduction of a 25% tax on marijuana in Oregon as a natural experiment, we conduct difference-in-differences, regression discontinuity, and event study analyses to identify the effect of the tax increase on marijuana prices and quantities, consumer stockpiling, and cross-border purchasing. Our results are consistent with the theoretical predictions of tax incidence—finding that consumer marijuana prices rise and the quantity of marijuana sold falls as a result of the tax. We also observe evidence of short-term stockpiling of marijuana in anticipation of the tax and find that the tax led to increased cross-border substitution, most notably, at the Washington State border. Based on our results, we also determine that supply is relatively elastic in this market, and demand becomes more elastic over time as consumers gain greater information on prices of substitutes.
ISSN:0927-5940
1573-6970
DOI:10.1007/s10797-019-09556-7