Association for Public Policy Analysis & Management

A source of consistent revenue for states has been the taxation of “sins”, or practices deemed socially detrimental in nature by those who could afford them. Prominent examples of sin taxation are the use of alcohol, tobacco, gambling and even sugar–sweetened beverage taxes. In this virtue, taxation of these behaviors not only reduces consumer demand for these goods, but also redeems these ’sinful’ acts through the public goods provided by their consumption tax revenues. Recently, some U.S. states have decided to experiment with a new source of “sin” tax revenue, marijuana. As of March 2018, 30 states (and D.C.) have passed medical marijuana laws (MMLs) and 9 states (and D.C.) have passed recreational marijuana laws (RMLs).

This paper examines the effects of recent RMLs on state–level “sin” tax revenue. Using state–level administrative tax revenue data from 2009-2016, we normalize the effective enactment dates of state-level RMLs and estimate a difference–in–differences model to examine the effect of marijuana legalization for recreational use (RMLs) on overall state-level tax revenue (as well as specific state tax revenues related to alcohol and tobacco consumption tax collection for states which have enacted RMLs). Robustness and sensitivity of our results are tested using both an event study analysis as well as using a synthetic control group composed from states which have enacted MMLs.

While many studies have considered individuals' choice to substitute or complement alcohol or tobacco usage with marijuana, only a few studies have considered the public finance decision faced by states regarding taxation of different “sins” – especially in regards to marijuana taxation. However, the legalization of the recreational production and sale of marijuana has brought in large revenue windfalls for states to use in order to improve current provision of public goods and services as well as re–invest in future provision, such public education and substance abuse treatment facilities.

Hence, many state tax agents now have begun to consider the use of RMLs as a large potential source of tax revenue. However RML passage may also have the un-intentional consequence of increasing the consumption of other "sin" goods or consumption of marijuana may replace other "sin" consumption. Thus, it's important to inform policymakers of the benefits and/or drawbacks of marijuana legalization due to its effect on public health, its potential to raise tax revenues as well as the possibility that RMLs may be more trouble than they are worth in terms of increased public expenditures.