OK, I can sort of see why the Old Republic may prohibit spice smuggling (same arguments fuelling War on Drugs in modern democracies).

But... why would the Empire under Sith Lord Palpatine bother doing so?

* Palpatine clearly has no big concern over the well being of the Imperial citizens, being a Sith Lord and all.
* Palpatine - or at least, his top circle - clearly cares about Imperial logistics and resources (as we see in canon, e.g. in "A New Dawn", "Tarkin" etc...). And legalizing spice and taxing the heck out of it seems like a good way to earn a parsec worth of money - as opposed to waste same such money - and Imperial fleet's resources - on barely effective anti-smuggling patrols, while letting Hutts and other criminals make all the profits off of smuggling.