The Laffer Curve is the relationship between tax rates and revenues. For income, taxes of 0% or 100% produce no tax revenue. Maximum tax receipts lie in-between.
The study of this phenomenon has mainly been theoretical.
The recent rush of states legalizing recreational marijuana gives us a real-world example.
In 2014, Colorado and Washington legalized recreational pot. Other states followed suit, all with different tax rates. If we exclude the results for Oregon and California in 2019 (in red), the remaining six blue points form most of the Laffer curve for cannabis. This blue power curve is highly negative (exponent -1.55) and significant (P-value 1.96E-03). It explains why Nevada, in 2019, made over 30 times as much per cannabis user as did Washington State in 2014.
In 2019, California, with nearly 13 times the population of its neighbor Nevada, made barely half of the receipts of The Silver State. California struggles mightily with the cannabis black market because of its tax policy. There’s a lesson here: Never turn a market analysis problem into a legal one. If someone blows smoke your way arguing for high marijuana taxes, don’t inhale.