What is an Excise Tax?

An excise tax is like the extra permit fee a park might charge you if you want to hike a particularly dangerous trail...

The park administrators are hoping that the tax will pay for any rescue attempts they will have to make. They also hope that the tax will dissuade large numbers of vacationers from risking their lives on the trail. Likewise, governments often use excise taxes to try to turn people away from unhealthy or costly activities like smoking.

An excise tax is a tax attached to the purchase of particular goods such as motor fuel, cigarettes, alcohol, or other products. Excise taxes exist not only on products but also on services like the use of the national highway system by trucks.

Governments at the federal, state, and local levels decide which specific goods and services will carry an excise tax. The lawmakers also determine the tax rate.

Authorities principally use excise taxes to generate revenue. For example, the fee that trucking firms pay for the use of the national highway system helps finance the maintenance and repair of the roads in the United States.

The same could be said for the excise tax that ordinary drivers pay for gasoline. The revenue from those sales might also contribute to the upkeep of the public roadway.

In addition to creating revenue, some policymakers use excise taxes as deterrents to specific activities. A case in point is the excise tax on tobacco products. The various charges attached to the price of a pack of cigarettes could put tobacco out of the reach of some smokers.

The authorities hope that the cost will persuade some smokers to quit — or at least reduce their use of tobacco. The fewer smokers there are, the less money the government makes from the sale of cigarettes. However, some public health authorities believe that the loss in revenue is insignificant in comparison to the money the nation will save in healthcare costs.

Smokers statistically have shorter lifespans that can be filled with medical complications. Their declining health may mean less time spent in the workforce, creating hardships for themselves as well as their families. Treating their smoking-related illnesses can also raise the cost of healthcare for the general population.

Additionally, part of their life may also include years of needing government assistance. The authorities believe that convincing people to stop smoking or never to start smoking is the best strategy, in the long run, to save money and improve public health. According to the World Health Organization (WHO), high-income countries can lower tobacco use by 4% by increasing the price of cigarettes by 10%.

When an excise tax curbs behavior that’s generally considered unhealthy, it’s sometimes called a “sin tax.” Like tobacco, other products and services associated with risky behavior that have excise taxes include gambling, firearms, and alcohol.

The WHO reports that studies show added benefits to excise taxes on alcohol. Reportedly, when excise taxes boost the price of alcoholic beverages, the sales of alcohol drop. In turn, there’s a reduction in the number of other activities called related harms. These harms include the following:

• alcoholism
• death from cirrhosis of the liver
• alcohol-related diseases
• automobile accidents
• infection of sexually transmitted diseases
• homicide and other violent crimes
• spousal and child abuse
• robbery
• accidents while at work

In recent years, some municipalities have sought to wean their citizens away from sugary drinks with a local excise tax. Research has linked the consumption of refined sugar to a variety of health issues, including obesity and diabetes. The WHO cites evidence that policies that increase the price of sugary drinks by a minimum of 20% can significantly reduce consumption.

There are also opponents of so-called sin taxes. They quote various research and studies that support their opposing viewpoint. They maintain that these sorts of excise taxes fail to have the life-changing effect that their backers promise. They also say that the taxes disproportionately hurt consumers who are low income.

For example, after Philadelphia established a 1.5 cent per ounce tax on sugary drinks, a survey found that demand for sugary beverages did decrease. However, among those who still consumed sugary drinks, low-income inner-city communities ended up paying more than their share of the tax burden. Residents of those communities had few options of where to shop. Meanwhile, wealthier Philadelphians who wanted soft drinks could afford to buy outside of the city and avoided paying the tax.

The revenue from sin taxes is often directed to the segments of the population that most contributed. The money is used to improve the community through health education initiatives and other programs. But opponents of the Philadelphia sugary drinks tax point out that less than a third of the revenue was spent on public health projects for low-income neighborhoods.

Excise taxes are primarily business taxes since governments collect them mostly from companies. For example, manufacturers of alcoholic beverages pay an excise tax. But that doesn’t mean that the company is willing to absorb the fee entirely. Instead, they generally pass the cost along to consumers by increasing the price of the product. Because the public is paying for a tax that is the burden of another party — the manufacturer — it’s referred to as an indirect tax.

Most consumers don’t realize that an item has an excise tax. Suppose an item costs $1.30. Few shoppers are likely aware that the item bears an excise tax of $0.30. If the charge were listed separately on their receipt, they might be outraged at having to pay the additional fee. But usually the excise tax is hidden in the price of the item. Consumers get used to thinking of the product costing $1.30.

Yet, there are some excise taxes that consumers do pay directly. The next time you purchase automobile tires, look at your itemized receipt, and you’ll notice an excise tax listed. You may also spot an excise tax on your bill for telephone services.

There are yet other excise taxes that consumers pay, but that are often referred to by different names. There’s a stiff penalty for withdrawing money early from a retirement account. That penalty is actually an excise tax.

Plus, the yearly property tax and vehicle tax that you pay to your local government is also an excise tax.

An excellent way to grasp the difference between sales tax and excise tax is to imagine a trip to the grocery store. In most places, you would expect to pay a small charge for each item you purchase. You also expect the tax to be minuscule compared to the cost of producing the product. In contrast, according to one estimate, the excise tax on beer can account for 40% of the cost of manufacturing the beverage.

The example underscores two critical differences between a sales tax and an excise tax. First, sales tax belongs to a multitude of items (groceries), while an excise tax accompanies only a few specific things (beer, cigarettes, etc.). Second, a sales tax is typically small, but not so for an excise tax. An excise tax tends to be notably more expensive than a sales tax.

The list of products and services with federal excise taxes is a long one. However, let’s briefly examine a few of the more notable among them and their tax rates as of 2022.

The price of gas includes an excise tax of $0.184 per gallon. The federal government uses an excise tax to penalize the makers of vehicles with fuel consumption worse than 22.5 miles per gallon. Manufacturers can expect to pay from $1,000 to $7,700 per car according to the car’s fuel economy.

The tax rate differs depending upon the type of alcohol and the amount of the beverage produced.

Domestic beer is $3.50 per barrel for the first 60,000 barrels. Then the rate leaps to $16 per barrel.

There are several types of wine, but let’s look at still wine, which is your basic non-sparkling, non-carbonated wine. A wine with less than 16% alcohol by volume (ABV) has a tax of $0.07 per gallon for the first 30,000 gallons. The fee is $0.17 per gallon for a production run between 30,000 and 130,000 gallons. Between 130,000 and 750,000 gallons the tax is $0.535 per gallon. After 750,000 gallons, the fee is $1.07 per gallon.

A wine with a high ABV of 21% to 24% has a levy of $2.15 for the initial 30,000 gallons. The tax is $2.25 per gallon for 30,000 to 130,000 gallons. Between 130,000 and 750,000 gallons the rate is $2.615. When production surpasses 750,000 gallons, the tax becomes $3.15 per gallon.

The alcohol with the most substantial tax is distilled spirits. The first 100,000 gallons trigger a fee of $2.70 per gallon. The tax jumps to $13.34 per gallon for amounts from 100,001 to 22.230M gallons. After 22.230M gallons, the tax moves to $13.50 per gallon.

Tobacco is one of the earliest products in the U.S. to receive a federal excise tax.

These days, a pack of 20 small cigarettes or cigars has a tax of $1.01. The same-sized pack of large cigarettes carries a fee of $2.11.

Handguns have a 10% excise tax, while other guns and ammunition have a fee of 11%.

The price of your vacation airline ticket to your dream destination includes a 7.5% excise tax. The transportation of property by cargo planes has a fee of 6.25%.

A gambler must pay 0.25% of the amount wagered if the wager is authorized by the state. If the bet is not authorized by the state, a bettor must pay 2% of the amount wagered.

A person accepting wagers authorized by the state must pay an annual tax of $50. Those who take bets not authorized by the state must pay a yearly fee of $500.

Some excise taxes have a fixed amount per unit. For example, the federal government attaches a fixed amount of $0.184 cents per gallon of gas. Two competing convenience store chains in the same town may sell their gasoline at different prices. No matter how low or how high each store sets its price, the excise tax remains at $0.184 cents per gallon. To calculate the excise tax you’re paying, you multiply $0.184 by the number of gallons you purchased.

Instead of a fixed amount, other excises taxes are percentages of the product’s value. An airline ticket has a 7.5% federal excise tax added to the base airline fare. As the price of the ticket increases, so does the amount of tax paid. In this case, you would multiply the excise rate by your base ticket price to find the excise tax amount paid.

You can’t begin a business that involves an excise tax without first registering with the appropriate agency. If your enterprise includes alcohol, tobacco, or firearms, you have to register with the Alcohol and Tobacco Tax and Trade Bureau (TTB). If your business has products or services connected to other industries that have excise taxes, you must register with the Internal Revenue Service (IRS).

If you neglect to register before launching your business, you face an initial penalty of $10,000 and an additional $1,000 per day for each day until you register.

You report and pay taxes to the TTB based upon your projected annual tax liability. If your business is small, you may have to report and pay only once a year. Otherwise, you may have to report and pay quarterly or even twice a month.

For the IRS, you file a tax return quarterly and pay twice a month.

Besides a federal tax, you may have other fees due. If your products or services carry state and local excise taxes, you’ll need to contact the appropriate state governments and local tax agencies for their specific rules of reporting and paying.