Federalism, Partial Prohibition, and Cross Border Sales: Evidence from Recreational Marijuana

Marijuana is partially prohibited: though banned federally, it is available to 1 in 4 U.S. adults under state statutes. We measure the size of the interstate trade generated by state-level differences in legal structure with a natural experiment: Oregon allowed stores to sell marijuana for recreational use on October 1, 2015, next to Washington where stores had been selling recreational marijuana since July 2014. Using administrative data covering the universe of Washington's sales and a differences-in-discontinuities approach, we find retailers along the Oregon border experienced a 36% decline in sales immediately after Oregon's market opened. Our results imply that Washington has earned between $64 million and $100 million in tax revenue from cross-border shoppers to date. These findings suggest that cross-border incentives may create a "race to legalize."