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Vertical integration and production inefficiency in the presence of a gross receipts tax

Benjamin Hansen, Keaton Miller and Caroline Weber

Journal of Public Economics, 2022, vol. 212, issue C

Abstract: We quantify the effects of a gross receipts tax (GRT) on vertical integration for the first time. We use data from the Washington state recreational cannabis industry, which has numerous advantages including a clean natural experiment: a 25% GRT imposed on cannabis firms was subsequently replaced by an excise tax at retail. We find the short-run elasticity of vertical integration with respect to the intermediate good net-of-tax rate is −0.15 and the long-run elasticity is about twice as large. We find these incentives lead to large output losses – production increases by 23 percent when the GRT is eliminated.

Keywords: Gross receipts tax; Turnover tax; Vertical integration; Natural experiment; Cannabis; Excise tax (search for similar items in EconPapers)
JEL-codes: H25 H32 H71 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jpubeco.2022.104693

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