Shifting tax incidence: Evidence from the Washington State cannabis market

Abstract We study how prices respond when a 25% gross receipts tax remitted by cannabis manufacturers was eliminated in Washington state and the retail excise tax was simultaneously increased from 25% to 37%. Standard theory suggests that this change should have increased welfare for manufacturers, retailers, and consumers; instead, our analysis shows that the reform unexpectedly shifted benefits toward manufacturers at the expense of retailers and consumers, who faced higher tax‐inclusive prices post‐reform. We hypothesize that this outcome was driven by behavioral factors such as anchoring and loss aversion. Our findings add to a growing body of evidence that tax reforms can affect market outcomes in ways not predicted by standard economic models, offering a cautionary lesson for policymakers considering similar reforms.