Setting Marijuana Taxes Too High Drives Consumers To The Illegal Market, Federally Funded Study Finds

States that impose high tax rates on regulated marijuana products are driving adult consumers to the illicit market, according to a new federally funded study.

The research, published in the journal Health Economics, looked at past-month cannabis purchasing behavior of 1,525 adults aged 21 and older.

Researchers with Ohio State University found that high cannabis taxes and prices are linked to “lower cannabis consumption and THC intake” from legal purchases, but that the majority of those reductions (89 percent) may be offset by consumers switching to unregulated products from the illegal market.

“If the illegal market is restricted, policymakers can expect increasing cannabis prices using excise taxes to reduce both unit and THC consumption, while generating tax revenues,” the study said. “However, given the sizable illegal market, a large portion of the consumption reduction due to taxes may be offset by switching to illegal products.”

States have worked to strike a balance between pricing marijuana low enough to transition adults to the regulated market but still high enough to generate revenue. The results so far have been mixed, with no firmly established universal price or tax rate.

The study, meanwhile, also demonstrated that legal and illicit cannabis flower are essentially “substitutes for each other.”

Raising the price of legal cannabis flower by 10 percent “results in a 0.9 percent-1 percent increase in illegal flower consumption (units and THC),” and the inverse follows a similar pattern, the researchers found.

“While the cross‐price elasticities for unit demand between legal and illegal flowers are symmetric (not statistically significant), the cross elasticities for THC demand suggest that the increase in THC from illegal flowers in response to higher legal flower prices exceeds the increase from legal flowers in response to higher illegal flower prices.”

Meanwhile, illicit flower seems to serve as a substitute for cannabis cartridges, as a 10 percent increase in the price of a THC cartridge drives consumption of unregulated flower by 0.4 percent.

The study was partly funded through a grant awarded by the National Institute on Drug Abuse (NIDA) under the National Institutes of Health (NIH).

“Many states are sacrificing the long-term health and sustainability of the legal cannabis market for theoretical short-term gains reaped by sky-high taxes,” Paul Armentano, deputy director of NORML, said.

“Imposing excessive taxes on legal cannabis strengthens illicit markets while weakening legal ones,” he said. “It encourages consumers to seek out unlicensed sellers who don’t check IDs, who lack the means or the desire to test their products for quality or purity, who operate without any regulatory oversight, and who don’t redistribute their revenues back into their local communities.”

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Separately, a recent analysis from the Marijuana Policy Project (MPP) showed that states have generated more than $28.4 billion in tax revenue from recreational marijuana sales since the first markets launched over a decade ago.

Some states, it pointed out, are now generating more revenue from legal cannabis than from alcohol.

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