Possible impacts of cannabis legalization on taxation and employment

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With states legalizing the recreational use of cannabis across the country, there is a need to analyze its macroeconomic impact. Previous research on cannabis legalization has documented the impacts on individuals or states, generally from a health or microeconomic perspective. However, there is little research on how this impact will affect the United States as a nation. In this research, we obtained data from all 50 states about their tax revenue and unemployment rate between 2006-2021. The current research explores if, and to what extent, the legalization of the recreational use of cannabis affects two major macroeconomic variables, tax revenue and unemployment rates. An event study based on the difference-in-difference framework was undertaken to derive the impact on the state-level data. An average treatment effect on the treated (ATT) was calculated by the length of exposure after legalization and by the years of legalization. Confounders that affect both cannabis legalization and macroeconomic variables such as crime rates and population demographics were also controlled for. The major finding of this research is that, legalization leads to a decrease in unemployment rates. The results suggest that a state that legalized cannabis may experience a decrease in the unemployment rate gradually after the year of legalization. However, the research does not have enough evidence to support that legalization has a consistent impact on total tax revenue for the legalized state. The results are relevant for states that are contemplating the legalization of recreational cannabis for an economic boost to recover from the pandemic.

Embargo status: Restricted until 01/2028. To request the author grant access, click on the PDF link to the left.

Cannabis, Legalization, Difference-in-Difference, Two way fixed effects