What Is an Excise Tax?

Excise Taxes Explained in Less Than 5 Minutes

Definition

An excise tax is one that targets a specific product or activity.

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Definition and Examples of an Excise Tax

An excise tax is considered to be a "narrowly based" or "indirect" tax. It's levied on certain products or services, not on a specific person. A tax levied on a specific person is referred to as a direct tax.

You likely paid an excise tax the last time you fueled up your vehicle. The federal government imposed an excise tax of 18.4 cents per gallon of gas as of January 2022, increasing to 24.4 cents per gallon of diesel fuel.

Note

Sumptuary excise taxes are levied on products and activities that aren't considered healthy or wholesome, such as tobacco, gambling, and alcoholic beverages. These are also known as "sin taxes."

The excise tax on tobacco products runs about $1.01 per pack. Tanning services are taxed at 10% of the cost under the terms of the Affordable Care Act (ACA). The federal excise tax on distilled liquor is $13.50 a gallon. But that's at the federal level. Residents of Washington pay $14.27 per gallon of distilled spirits as of January 2022.

How an Excise Tax Works

Excise taxes are regressive. They impose the greatest financial burden on families that rely on or purchase a good 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 7.1% of their incomes to excise taxes, according to a study by the Institute on Taxation and Economic Policy. The wealthiest paid only 0.9% of their incomes.

Note

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 in the millennium.

Some of these taxes are levied per unit, such as a flat fee per gallon of gasoline or a pack of cigarettes. But others are "ad valorem" excise taxes. They're a percentage of what you spend rather than a flat fee. For example, you pay a 10% excise tax for tanning services.

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. The tax won't be cited or delineated on your receipt as a sales tax would.

How Much Revenue Do 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. Alcohol sales contributed $10 billion, or 10%.

Note

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 as well.

Boston imposes an excise tax of $25 per each $1,000 of value on all registered vehicles. 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.

States tend to focus their excise taxes on "fun" purchases rather than essentials like health care, such as alcohol, tobacco, candy, and gambling, but gasoline is subject to state-level excise taxes at times, too.

Key Takeaways

  • 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. But the Affordable Care Act 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.

Frequently Asked Questions (FAQs)

What does the money raised by federal excise taxes pay for?

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.

Who pays an excise tax?

Wholesalers, importers, or manufacturers generally pay this tax to the federal government. But they pass the burden on to retailers, who, in turn, pass it on to consumers.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Energy Information Administration. "Frequently Asked Questions (FAQs)."

  2. Tax Foundation. "Excise Tax Application and Trends."

  3. IRS. "Excise Tax."

  4. Alcohol and Tobacco Tax and Trade Bureau. "Tax Rates."

  5. Tax Policy Center. "State Alcohol Excise Tax Rates."

  6. Institute on Taxation and Economic Policy. "Who Pays? 6th Edition."

  7. Tax Policy Center. "What Are the Major Federal Excise Taxes, and How Much Money Do They Raise?"

  8. City of Boston. "How To Pay Your Motor Vehicle Excise Tax."

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