Marijuana Law, Policy & Reform

Editor: Douglas A. Berman
Moritz College of Law

Sunday, September 23, 2018

"Taxation and Market Power in the Legal Marijuana Industry"

the title of this post is the title of this new paper now available via SSRN authored by Brett Hollenbeck and Kosuke Uetake. Here is its abstract:

In 2012 the state of Washington created a legal framework for production and retail sales of marijuana.  Eight other states have subsequently followed.  These states hope to generate tax revenue for their state budgets while limiting harms associated with marijuana consumption.  We use a unique dataset containing all transactions in the history of the industry in Washington to evaluate the effectiveness of different tax and regulatory policies under consideration by policymakers and study the role of imperfect competition in determining these results.

We document that overall demand is relatively inelastic, that restrictions on entry result in retailers with significant market power, and that cost shocks are more than fully passed through from retailers to consumers.  We combine these empirical estimates to calculate the relationship between revenue and the tax rate, the dead-weight loss of taxation and the share of the tax burden that falls on consumers and producers, each of which are significantly effect by imperfect competition. 

We find that despite having the nation's highest tax rate, Washington still has significant scope to increase revenues by raising the tax rate on retail marijuana sales.  That is, they are still on the upward sloping portion of the laffer curve.  The amount of revenue generated by a given tax increase is also significantly larger due to retailer market power than it would be under perfect competition.  We also find significant social costs of taxation, roughly 2 dollars are lost to consumers and producers for every dollar of tax revenue generated.

http://lawprofessors.typepad.com/marijuana_law/2018/09/taxation-and-market-power-in-the-legal-marijuana-industry.html

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