The Impact of Various Tax Bases and Rates on Cannabis Consumption Among US Adults Who use Recreational Cannabis

As an increasing number of states legalize recreational cannabis, it is increasingly important to understand the optimal tax design for recreational cannabis. Currently, various tax bases (weight, potency, price) and rates are used. However, the empirical evidence on the impact of tax-related attributes (pre-tax prices, tetrahydrocannabinol [THC] levels, tax bases, and tax rates) and their interactions on consumption is limited. To address this evidence gap, this study utilizes a split-sample volumetric choice experiment to understand the impact of pre-tax prices, tax bases, tax rates, and THC levels on cannabis consumption and THC intake by US adult users. We further estimated the own- and cross-price elasticities for four cannabis forms (legal flower, illegal flower, edibles, and vaping concentrates). We collected a nationally representative sample of N = 1525 US adults aged 21+ who reported the past 30-day use of recreational cannabis in June and July 2024. Participants were randomized into seeing one of the three different tax bases, and each person answered 9 choice questions where they were given varying combinations of pre-tax prices, tax rates, and THC levels of the four cannabis products. Zero-inflated negative binomial regressions were used to estimate the impacts of varying factors on the cannabis consumption (units and THC) and own- and cross-price elasticities. The interactions between tax bases and their targeted attributes were explored using a linear model accounting for individual fixed effects. Higher pre-tax prices and tax rates significantly reduce consumption, whereas higher THC levels increase consumption. Compared to a tax rate of 60% of pretax prices or equivalent, an 80% rate does not induce further consumption reduction. The overall price elasticities of cannabis demand range from -0.4 to -0.5, with form- or product-specific price elasticities ranging between -0.2 and -0.4. Illegal and legal flowers are substitutes for each other. Edibles and cartridges are complements for each other. In addition, illegal flowers are substitutes for legal cartridges, and edibles are complements to flowers. While increases in the prices of legal products significantly reduce their consumption, 89% of this reduction may be offset by switching to illegal products. While tax bases do not significantly impact consumption, a potency tax base reduces the consumption of higher potency products, and a price tax base reduces the consumption of higher-priced products. 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. However, given the sizable illegal market, a large portion of the consumption reduction due to taxes may be offset by switching to illegal products. Tax rates reduce consumption in addition to base prices. There is room to increase cannabis tax rates to 60% of pretax prices or equivalent to counter the decreasing prices. While tax bases are not effective in reducing overall consumption, they can shift the preference of products with the attributes that they target (e.g., high potency or high price); therefore, they could be a useful tool to shift product choices. Capping THC levels also has a direct impact on reducing consumption.