Study: Higher Marijuana Taxes May Reduce Legal Sales and Lower Tax Revenue
- The study found that increasing marijuana taxes leads to lower legal marijuana sales, with a 10% tax increase resulting in a 12.6% sales reduction.
- Marijuana demand is highly sensitive to price changes; a 10% price increase corresponds to a 17.8% decrease in legal sales.
- Tax hikes are often over-shifted to consumers, where a $1 tax increase causes a $4 to $6 increase in retail marijuana prices.
- Higher cigarette and beer taxes may reduce legal marijuana sales, indicating these products might be economic complements, while e-cigarette taxes have little effect.
A study published online today by the International Journal of Drug Policy found that higher marijuana taxes are associated with lower legal sales, while tax increases may also lead to larger-than-expected price hikes for consumers.
Researchers from The Ohio State University Wexner Medical Center examined state-published marijuana tax revenue and sales data from January 2014 through June 2023, using state-month-level data to evaluate how taxes and prices affect the demand for legal recreational marijuana.
The study found that demand for legal marijuana is highly price sensitive. According to the analysis, a 10% increase in marijuana taxes was associated with a 12.6% reduction in legal sales, while a 10% increase in prices was linked to a 17.8% decrease.
Researchers also found that marijuana excise taxes are often over-shifted to consumers. A $1 increase in marijuana taxes was associated with a $4 to $6 increase in retail prices, suggesting that tax hikes can have a much larger effect on consumer costs than the tax increase alone.
The study also found that higher cigarette and beer taxes may reduce legal marijuana sales, which researchers said suggests the products may serve as economic complements. E-cigarette taxes, meanwhile, showed little to no effect on legal marijuana sales.
“Increases in cannabis excise taxes significantly raise the prices of legal products,” the study concludes. “Higher cannabis taxes reduce legal cannabis sales but also decrease tax revenues.”
The findings come as legal marijuana markets across the U.S. continue to face competition from illicit sales, intoxicating hemp products and neighboring states with different tax structures. Researchers said policymakers should consider how tax changes affect consumer behavior when introducing or amending marijuana regulations.