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Marijuana tax incidence, stockpiling, and cross-border substitution

  • Muhammad Salar Khan
  • Paul N. ThompsonEmail author
  • Victor J. Tremblay
Article

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 

JEL Classification

H2 H3 H7 

Notes

Acknowledgements

We would like to thank Scott Akins, Qinglai Meng, and Carol Tremblay for helpful comments and discussion on previous drafts of the paper. We also want to give special thanks to Steve Lurch (State Economist, Washington State), Aaron Hanson (Budget Analyst, Washington Liquor and Cannabis Control Board), Kelly McDermott (Public Records Coordinator, Washington Liquor and Cannabis Control Board), Ramon Cabauatan-Vasquez (Economist, Oregon Health Authority, Public Health Division), and Sam Lambert (Analyst, Benton County) for help in obtaining the data used in this analysis and answering our many questions on the recreational marijuana markets in Oregon and Washington.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  • Muhammad Salar Khan
    • 1
  • Paul N. Thompson
    • 2
    Email author
  • Victor J. Tremblay
    • 2
  1. 1.Schar School of Policy and GovernmentGeorge Mason UniversityArlingtonUSA
  2. 2.Department of EconomicsOregon State UniversityCorvallisUSA

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