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Key Takeaways
- A recent Ohio State study reveals that 89% of reduced legal cannabis purchases due to cannabis tax hikes shift to the unregulated market.
- Higher cannabis taxes lead to significant price increases, making legal products less competitive against illegal options.
- States raising taxes contribute to the growth of the unregulated cannabis market, undermining tax revenue and public health goals.
- Policymakers need to reconsider tax rates as they impact legal market viability and consumer behavior towards unregulated products.
- Research shows a strong negative correlation between cannabis tax hikes and legal sales, with the unregulated market thriving in response.
A federally funded study from Ohio State University, published in Health Economics earlier this month, found that 89% of the drop in legal cannabis purchases caused by tax-driven price hikes gets absorbed by the unregulated market. The cannabis industry has been saying exactly this for years. Now it’s peer-reviewed.
Let’s set the scene. State legislators raise cannabis excise taxes. Dispensary prices climb. Consumers notice. They go buy from their guy instead. Legal market loses sales, tax revenue drops, and the unregulated market gets a little stronger. Rinse, repeat.
This is not a mystery. It’s not some obscure edge case either. What we’re witnessing is basic economics playing out in real time across state-legal cannabis markets, and it has been happening in slow motion for years while the industry screamed into the void about exactly this problem. The response from policymakers was, more often than not, a polite dismissal or a suggestion that operators were just protecting their margins.
Well. Turns out the operators were right.
What Did the Ohio State Study on Cannabis Taxes Actually Find?
The researchers ran a volumetric choice experiment, presenting participants with real purchasing decisions across legal flower, illegal flower, edibles, and THC cartridges at varying price and tax levels. The sample skewed experienced: 54% of participants reported using cannabis daily, and 54.3% said they made 100% of their purchases from legal sources under current market conditions.
Then prices went up. And consumers moved.
The headline stat: 89% of the reduction in legal cannabis consumption triggered by higher taxes and prices gets offset by consumers switching to the unregulated, unregulated market. That is not a rounding error. That is the near-total collapse of the public health and revenue rationale for high cannabis excise taxes.
More specifically, when legal cannabis flower prices rise by 10%, illegal flower consumption increases by 0.9% to 1%. That cross-market substitution effect holds for THC cartridges too. A 10% price increase on legal cartridges pushes 0.4% more THC consumption toward illegal flower.
The study also pinpointed a tipping point. Compared to a baseline tax rate of 20% of pre-tax prices, rates of 40%, 60%, and 80% reduce legal unit consumption by 14%, 29%, and 32%, respectively. Once a state hits that 80% rate, the additional reduction in consumption essentially flatlines. The consumer has already left the building.
The Numbers From a Separate NIH-Funded Study Make It Worse
The Ohio State study on consumer switching is damning enough on its own. Stack it alongside a companion paper published in the International Journal of Drug Policy which will be in the in September edition, was also funded by NIH/NIDA, and the picture gets darker.
That study, authored by Dong Won Yoon, Hojin Park, and colleagues, used state-month-level sales data from January 2014 to June 2023 to estimate the causal impact of cannabis excise taxes on legal market sales. The results: a 10% increase in cannabis taxes leads to a 12.6% reduction in legal cannabis sales. A 10% price increase causes a 17.8% drop in legal sales.
The over-shifting finding is particularly notable. Every $1 increase in cannabis excise taxes translates to a $4 to $6 increase in retail prices. So a state imposing what looks like a modest tax bump ends up hammering the retail price at a multiplier effect that consumers absolutely feel at the register.
Higher taxes reduce sales. Lower sales reduce tax revenue. The “win-win” framing of cannabis taxation falls apart under the actual data.
The Industry Said This For Years. Nobody Listened.
Here is the part that should embarrass some policymakers.
Cannabis operators, dispensary owners, cultivators, and advocacy groups have been making this exact argument since the first recreational markets opened. The counterargument was usually some version of “you just don’t want to pay your taxes” or “legal cannabis can absorb higher rates because consumers want regulated, tested products.”
That last part is not entirely wrong. Product quality, lab testing, and consumer confidence do matter. But at some price differential, none of that is enough. The unregulated market does not have the same overhead. It does not pay excise taxes, licensing fees, or compliance costs. It can always undercut a licensed dispensary if the spread gets wide enough, and aggressive state tax policy helps create that spread.
NORML’s Deputy Director Paul Armentano put it plainly in a March 2026 op-ed: “Many states are sacrificing the long-term health and sustainability of the legal cannabis market for theoretical short-term gains reaped by sky-high taxes. Imposing excessive taxes on legal cannabis strengthens unregulated markets while weakening legal ones. It encourages consumers to seek out unlicensed sellers who don’t check IDs, who lack the means or the desire to test their products for quality or purity, who operate without any regulatory oversight, and who don’t redistribute their revenues back into their local communities.”
That is not a new argument. It is the same argument the industry has made for years. The only difference now is that two federally funded research teams have confirmed it with peer-reviewed data.
Which States Got It Wrong, and Which One Course-Corrected?
In 2025, lawmakers in Maine, Maryland, Michigan, and Minnesota all passed legislation hiking cannabis-related sales taxes. Meanwhile, the unregulated market nationally is estimated to represent anywhere from 40% to 60% of total cannabis sales, based on figures cited in the Health Economics study. States raising taxes into that environment are not narrowing that gap. They are widening it.
California, to its credit, moved the other direction. California successfully pushed legislation that rolled back marijuana-related taxes and halted a proposed cultivation tax hike, with that bill advancing to the governor’s desk in September 2025. The District of Columbia’s City Council also rejected a budget proposal in June 2026 that would have significantly raised retail cannabis sales tax rates.
Those decisions were not made in a vacuum. California’s legal cannabis market had been bleeding market share to unlicensed operators for years. The tax rollback was a recognition, however overdue, that competitive pricing is a prerequisite for legal market viability.
What Needs to Change Before More Legal Markets Collapse?
The legal cannabis industry generated more than $28.4 billion in recreational tax revenue since the first markets launched, according to a Marijuana Policy Project analysis. That is a real number, and it represents a genuine policy achievement. But that same legal market saw its first year-over-year national revenue decline in 2025, per a Vangst and Whitney Economics analysis.
Those two data points together tell a story. The short-term revenue extraction from high taxes is reaching its ceiling, and the structural damage to legal market sales is starting to show up in the aggregate numbers.
The research is now clear: cannabis excise taxes are over-shifted to retail prices at a 4x to 6x multiplier, consumers are highly price-sensitive in the presence of an accessible unregulated alternative, and 89% of the legal market’s tax-induced consumption drop gets recaptured by unlicensed sellers. That is not a sustainable foundation for state cannabis policy.
Policymakers who want functioning legal markets need to treat tax rates as a competitive variable, not just a revenue lever. That means looking honestly at the price gap between licensed and unlicensed products, benchmarking tax structures against real consumer behavior data, and resisting the impulse to treat cannabis operators as an endless source of public revenue.
The industry has been saying this for a long time. The federal government just paid two research teams to confirm it. Maybe now someone will listen.
Frequently Asked Questions
Yes. According to a 2026 study published in Health Economics by Ohio State University researchers and funded by NIH/NIDA, 89% of the reduction in legal cannabis consumption caused by tax-driven price increases gets offset by consumers switching to illegal, unregulated products. Legal and illegal cannabis flower function as direct substitutes in consumer behavior.
A lot more than the tax itself. Research published in the International Journal of Drug Policy in September 2026 found that a $1 increase in cannabis excise taxes raises retail prices by $4 to $6 due to over-shifting through the supply chain. A 10% tax hike translates to a 12.6% decline in legal sales.
The Ohio State Health Economics study found that compared to a baseline rate of 20% of pre-tax prices, tax rates of 40%, 60%, and 80% reduce legal unit consumption by 14%, 29%, and 32%, respectively. Beyond 60%, further rate increases produce little additional consumption reduction because consumers have largely already moved to unregulated sources.
The unregulated market carries none of the overhead of licensed dispensaries: no excise taxes, no licensing fees, no compliance or testing costs. When state tax policy pushes licensed retail prices high enough, that price gap becomes too large for many consumers to ignore, particularly when access to unregulated products remains relatively easy.
