Marijuana tax incidence, stockpiling, and cross-border substitution

Muhammad Salar Khan (), Paul N. Thompson () and Victor J. Tremblay ()
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Muhammad Salar Khan: George Mason University
Paul N. Thompson: Oregon State University
Victor J. Tremblay: Oregon State University

International Tax and Public Finance, 2020, vol. 27, issue 1, No 5, 103-127

Abstract: Abstract 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.

Keywords: Marijuana; Taxes; Stockpiling; Cross-border substitution (search for similar items in EconPapers)
JEL-codes: H2 H3 H7 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s10797-019-09556-7

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