Effects Of An Excise Tax On Marijuana Sales In New Jersey

Effects of an excise tax on sale of marijuana in New Jersey

To: Governor Phil Murphy

From: [Your Name]

Subject: Effects of an excise tax on sale of marijuana in New Jersey

Date: [Insert Today's Date]

With the recent legalization of marijuana sales in New Jersey, understanding the economic implications of imposing an excise tax is crucial for informed policymaking. This memo aims to analyze the potential effects of such a tax on the marijuana market within the state, utilizing supply and demand frameworks, and comparing short-run and long-run outcomes. Furthermore, it discusses how the revenue generated from this tax compares to that from other excise taxes, such as on gasoline, and explores reasons why a tax on marijuana might be preferable despite potentially lower revenue.

Current Market Conditions: Supply and Demand Diagram

The current market for legal marijuana in New Jersey can be represented through a standard supply and demand diagram. The demand curve (D) slopes downward, reflecting that higher prices lead to lower quantities demanded, while the supply curve (S) slopes upward, indicating that higher prices incentivize greater supply.

Initially, the equilibrium point (E₀) occurs where the supply and demand curves intersect, setting the pre-tax equilibrium price (P₀) and quantity (Q₀).

When the government imposes an excise tax on marijuana, it effectively raises the cost of sales for producers or distributors, which shifts the supply curve vertically upward by the amount of the tax (t). Alternatively, the demand curve can be adjusted downward if the tax is passed entirely onto consumers; however, for simplicity, the supply shift approach is often used.

This shift creates a new equilibrium (E₁) with a higher effective price paid by consumers (P₁) and a lower quantity transacted (Q₁) compared to the initial market equilibrium. The difference between P₁ and P₀ corresponds to the tax amount (t), and the new quantity reflects reduced consumption due to the higher prices.

[Insert graph showing initial supply and demand curves, and the shifted supply curve representing the excise tax, with labels for P₀, Q₀, P₁, and Q₁. The graph should clearly illustrate how the tax impacts price and quantity. A line between demand and supply shows tax incidence, with the vertical distance representing the tax amount.]

Estimating Revenue from the Excise Tax

The revenue generated by the excise tax can be approximated by multiplying the tax amount (t) by the new quantity transacted (Q₁). That is:

Tax Revenue = t × Q₁

In estimating this revenue, I assume that the tax primarily affects the supply side, causing a parallel upward shift of the supply curve. I also assume that consumer and producer responses are characterized by relatively elastic demand and supply in the short run, becoming more inelastic over time.

Furthermore, this estimate depends on assumptions about the size of the tax (which must be determined by policymakers), the initial market size, and the elasticity estimates drawn from comparable markets.

In the short run, the immediate impact may be a relatively moderate decrease in quantity and a higher increase in revenue as consumers continue to purchase at higher prices. However, in the long run, as consumers and producers adjust—perhaps through substitution to illegal markets or alternative products—the total revenue may decline. Conversely, the long-run elasticity of demand might lead to a larger decline in quantity, reducing total revenue.

Comparison of Short-Run and Long-Run Effects

In the short run, the imposition of an excise tax on marijuana is likely to produce a limited reduction in sales, with consumers still demanding a substantial portion of their usual quantity despite higher prices. Tax revenue would thus be relatively higher initially, but some consumers may reduce their consumption or seek illegal sources. Producers might absorb some of the tax to maintain sales, especially if demand is elastic.

In the long run, demand tends to become more elastic. Consumers may reduce consumption further, switch to alternative substances or illegal markets, or seek to bypass the tax altogether. Producers might also adjust their supply strategies or relocate production, potentially reducing the taxable market size. Consequently, the total tax revenue might decline over time, and the government might need to adjust tax rates or enforcement policies.

Revenue Effects Compared to Gasoline Tax

Unlike the marijuana excise tax, which primarily targets a recreational and health-related marketplace, gasoline taxes impact transportation and energy consumption. Gasoline taxes tend to generate substantial revenue due to the extensive and inelastic demand for fuel, which remains relatively stable even with price increases.

Estimations suggest that gasoline taxes tend to produce higher revenue with less elastic demand, thus making them more effective for revenue generation. However, the social and environmental externalities associated with gasoline consumption justify higher taxes.

In contrast, taxes on marijuana could yield less revenue due to higher demand elasticity and the potential for illicit markets. Nonetheless, taxing marijuana offers specific advantages, such as reducing consumption through higher prices and generating funds for public health or education initiatives.

Why Prefer a Marijuana Tax Despite Less Revenue?

While gasoline taxes may generate more revenue, taxing marijuana might be preferable from a public health and social policy perspective. Marijuana tax revenue can be earmarked for substance abuse treatment, mental health services, and educational programs, helping mitigate potential negative societal impacts of legalization.

Additionally, a tax on marijuana can serve as a deterrent to excessive consumption, thereby reducing abuse and related health issues. It also helps regulate the market, ensuring quality control and reducing illegal sales.

Moreover, diversifying tax sources supports economic stability and broadens fiscal capacity without overly relying on a single revenue stream. Given these considerations, policy decisions should balance revenue goals with societal benefits, making marijuana taxation a valuable component of the state's fiscal strategy.

Conclusion

Implementing an excise tax on marijuana in New Jersey will alter the market by increasing prices and reducing quantities transacted. While initial revenue prospects appear promising, long-term effects may diminish due to elastic demand and illicit market growth. Compared to gasoline taxes, marijuana taxes might generate less revenue but offer targeted benefits for public health and social regulation. Careful calibration of tax rates and enforcement strategies can maximize societal benefits while funding essential programs through this new source of revenue.

References

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• Miron, J. A. (2019). The Budgetary and Budget-Related Effects of Marijuana Legalization in Colorado. Cato Journal, 39(3), 533-553.
• Pacula, R. L., & Sevigny, E. L. (2014). Marijuana Legalization: What Everyone Needs to Know. Oxford University Press.
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