An excise tax is a tax that targets a specific product or activity. It’s not a general, obligatory tax that affects a large portion of the population, such as a tax on income. It zeros in on something that perhaps only a portion of the population spends money on.
You most likely pay an excise tax now and again without even being aware of it. Avoiding it can be difficult, at least if you don’t want to give up something you need or enjoy. The key to knowing if you’re contributing to an excise tax is in knowing where to look for it.
Definition and Examples of an Excise Tax
An excise tax is considered to be a “narrowly based” or “indirect” tax because it’s levied on certain products or services, not on a specific person. (A tax levied on a specific person who must pay that tax to the government is called a direct tax.)
You likely paid an excise tax the last time you fueled up your vehicle. The federal government imposes an excise tax of 18.4 cents per gallon of gas, increasing to 24.4 cents on a gallon of diesel fuel.
Also known as “sin taxes,” sumptuary excise taxes are levied on products and activities that aren’t considered healthy or wholesome, including tobacco, gambling, and alcoholic beverages. The excise tax on tobacco products runs about $1 per pack. Tanning services are taxed at 10% of the cost, and the federal excise tax on distilled liquor is $13.50 a gallon.
How an Excise Tax Works
Excise taxes are “regressive” because they impose the greatest financial burden on families that rely on or purchase a significant number of these taxed items or services, regardless of whether they have the income to support this tax system. Those who earn the least pay about 1.1% of their incomes to excise taxes, while the wealthiest pay only 0.3% of their incomes, according to the Tax Policy Center.
Some of these taxes are levied per unit, such as a flat fee per gallon of gas or a pack of cigarettes, but others are "ad valorem" excise taxes. They charge a percentage of what you spend rather than a flat fee. For example, you pay a 10% excise tax for tanning services.
The federal government collects all this money and deposits about 40% of it into its general fund. Taxes on alcohol, tobacco products, indoor tanning, and health insurance are a few of the taxes that go to the general fund. The other roughly 60% goes toward trust funds dedicated to paying for transportation, including highway and airport improvements and maintenance, and health-related spending.
Excise taxes were much more onerous 70 years ago when they generated a slice of the GDP that was more than five times higher than they do today.
Do I Have To Pay an Excise Tax?
Individuals don’t directly pay excise taxes to the federal government, but these funds come out of their pockets just the same. The tax is typically included or factored into the retail price of the product or service that’s purchased.
Let’s say you just paid $3 for a gallon of gasoline. Most of that price is paid for the gasoline that went into your tank—say $2.36—but not all of it. The difference went to the “hidden” excise tax, but the tax won’t be cited or delineated on your receipt as a sales tax would.
Wholesalers, importers, or manufacturers generally pay this tax to the federal government. They may pass the burden on to retailers, who in turn pass it on to consumers.
How Much Revenue Excise Taxes Raise?
The U.S. government collected almost $100 billion in various excise taxes in 2019, according to the Tax Policy Center.
Transportation-related excise taxes generated $40.5 billion, or 41% of the total. This money went to the Highway Trust Fund. The Airport and Airway Trust Fund received $16 billion of that $40.5 billion, or 16% of all excise taxes collected. Tobacco excise taxes brought in another $12.5 million, representing 13% of the total, and alcohol sales contributed $10 billion, or 10%.
Excise taxes made up 2.9% of the federal government’s tax revenue in 2019.
Types of Excise Taxes
All this taxation isn’t exclusively imposed by the U.S. federal government. All states and some municipalities levy some form of excise tax.
Boston imposes an excise tax of $25 per each $1,000 of value on all registered vehicles, and that value is set by the Massachusetts Registry of Motor Vehicles. In some states, veterans, disabled individuals, or charitable organizations are exempt.
The major types of federal excise taxes are those imposed on alcohol, tobacco, airline travel, and motor vehicle fuel, but health-related goods and services are subject to excise taxes, too.
Sports wagering such as you might enjoy online are subject to federal excise taxes as well.
States tend to focus their excise taxes on “fun” purchases rather than essentials like health care—things like alcohol, tobacco, candy, and gambling—but gasoline is subject to state-level excise taxes at times, too.
- An excise tax is similar to a sales tax, but it’s levied only on certain products or services.
- The most common excise taxes are imposed on tobacco, alcohol, and gasoline sales, but the ACA also provides for an excise tax on some health-related services and products.
- The tax is generally payable by the manufacturer, but the cost is invariably passed on to retailers and ultimately to consumers.
- Excise taxes are collected by all 50 states and some municipalities as well as by the federal government.