A newly released federally-funded study suggests that states with higher taxes on legal cannabis may be unintentionally encouraging consumers to purchase cannabis from illegal sellers instead of licensed retailers.
The research examined the buying habits of 1,525 Americans aged 21 and over who had used recreational cannabis within the previous month. Researchers analyzed how pricing and taxation influence purchasing decisions in both regulated and unregulated markets.
According to the findings, retail prices and higher taxes were associated with reduced purchases of legal cannabis and lower THC consumption through licensed outlets. However, researchers estimated that as much as 89% of the reduction in legal cannabis consumption may be offset by consumers switching to illicit products.
The authors noted that excise taxes can reduce cannabis use and increase government revenue if illegal sales are effectively controlled. Without strong enforcement, however, a substantial share of consumers may avoid higher legal prices by buying from unlicensed suppliers instead.
Many states have attempted to find the right balance between generating tax income and keeping regulated cannabis affordable enough to compete with illegal sellers. So far, there has been no widely accepted tax structure that consistently achieves both goals.
Researchers also found that illegal and legal cannabis flower products compete directly with one another. Their analysis showed that a 10% increase in the price of legal flower was linked to roughly a 1% rise in purchases of illicit flower, measured by both product quantity and THC content. Similar substitution patterns appeared in the opposite direction, although changes in THC demand were more pronounced when consumers shifted from legal to illegal products.
The report also indicated that unregulated cannabis flower can replace THC vape cartridges in some cases. A 10% increase in cartridge prices was associated with a 0.4% increase in purchases of illegal flower.
Commenting on the findings, NORML’s Paul Armentano argued that excessive cannabis taxes weaken licensed businesses while giving illegal operators a competitive advantage. He added that unlicensed sellers often operate without product testing, age verification, or regulatory oversight.
Separate figures from the Marijuana Policy Project recently showed that states have collected over $28.4 billion in tax revenue from adult-use cannabis sales since legal recreational markets first opened. Another industry analysis by Whitney Economics and Vangst reported that national cannabis sales revenue declined year over year in 2025, marking the first annual drop since recreational markets began in 2014.
The findings of this report are unlikely to be surprising to the marijuana industry, such as firms like Canopy Growth Corp. (NASDAQ: CGC) (TSX: WEED), since the industry has always argued that excessive taxes inadvertently promote the black market for cannabis products.
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