Excise Tax

What It Means

An excise tax is a fee charged by the government on specific goods or services that are purchased by some, but not all, consumers. Like a sales tax, an excise tax is collected by the seller when the goods are sold to a customer. Liquor, cigarettes, and luxury cars are examples of goods that have an excise tax.

An excise tax can be a percentage of the price of the good or service. For example, if the government charges a 7.5 percent excise tax on the fare of a domestic airplane ticket, and a plane ticket costs $300, the excise tax of that sale would be $22.50 (7.5 percent of $300). An excise tax can also be charged as a fixed dollar amount. The U.S. federal government’s excise tax on hard liquor, $13.50 per gallon (as of 2007), is such a tax. Cigarettes also carry a federal excise tax (39 cents per pack in 2007). Individual states and counties may also charge excise taxes on the same goods. For example, the state of Ohio charged a $1.25 excise tax per pack of cigarettes in 2007. Therefore, for a pack of cigarettes a consumer in Ohio would pay both federal and state excise taxes, a total of $1.64, in addition to the retail price of the pack. In every case, the store or company that sells the good collects the tax and sends it to the government.

In addition to telephone service, cigarettes, and hard liquor, the federal government taxes gasoline, airline tickets, and a variety of other goods and services. These excise taxes increase the total price of the goods, sometimes substantially. They are often designed to discourage producers from making them and consumers from buying them (for instance, increasing the price of cigarettes is an effort to reduce smoking, thereby protecting the public’s health). In many cases an excise tax is also used to raise revenue for a specific purpose linked to the good being taxed (for example, revenues from cigarette taxes might fund cancer research). Excise taxes are one of the primary ways the U.S. government collects money.

When Did It Begin

Holland and England, the first countries to impose excise taxes, began doing so in the seventeenth century. When these European nations established colonies in America, they collected excise taxes from American colonists on particular products, such as liquor. The first time the independent nation of the United States imposed a federal excise tax was in 1791, but so many citizens and legislators opposed the tax that it was abolished in 1802.

Throughout its history the U.S. government has imposed excise taxes when it has needed to raise money for military expenses during wartime. The taxes were usually repealed or removed after the wars ended. During the War of 1812, fought against Great Britain, the United States introduced a tax on watches, jewelry, gold, silverware, and other expensive items. The excise tax imposed during the Civil War (1861–65) was on all manufactured goods. This tax raised a great deal of income. The Spanish-American War, fought against Spain in 1898, was funded by excise taxes on, among other things, petroleum and sugar products. In order to raise the funds it needed to support the military during World War II (1939–45), the U.S. government imposed excise taxes on furs, jewelry, and leather. Excise taxes on liquor and cigarettes have provided constant sources of funding for the government, even during peacetime.

More Detailed Information

The federal government collects several different types of taxes from citizens. Even though the money it gets from excise taxes makes up only about 10 percent of its total revenue, it is still one of the most important sources of funding. The main sources of income for the government are excise taxes, income taxes (which are levied on the earnings that individuals and businesses make), and Social Security taxes (taxes paid by working citizens to fund the federal retirement-benefits program).

A wide range of motor fuels carry a federal tax. In addition to gasoline, fuels such as diesel, boat fuel, and fuel for airplanes (called aviation fuel) are in this category, as are kerosene and liquefied natural gas. As of 2007, the amount of the federal tax on motor fuel was 18.4 cents per gallon. Some states charge additional taxes on gasoline and other motor fuels. For example, in 2007 Pennsylvania was charging a tax of 2 cents per gallon on motor fuel. The posted price for gasoline includes both the state and the federal taxes. If a buyer of gasoline in Pennsylvania were to see a price of $2.56 per gallon of unleaded gasoline posted on a sign at a gasoline station, $2.56 per gallon would be the exact price he would pay per gallon of fuel, because it would include the federal and state taxes (totaling 20.4 cents per gallon). The state and federal governments use the tax on motor fuel, which is among the most important excise taxes, to pay for highways, roads, and public transportation systems.

Excise taxes are usually imposed on goods, but the government also collects excise taxes on what it refers to as “activities,” specific actions that involve a transfer of money. A major example is gambling. Where gambling is legal, as it is in many states and cities, the operators of casinos pay a wager tax on gambling (the rate was 0.25 percent in 2007). This means that they must pay a portion (0.25 percent) of the amount they earn from the gamblers in their casino to the federal government. They collect the amount of this charge from their customers. State lotteries also pay the gambling tax to the federal government. Whenever a customer purchases a lottery ticket, the tax of 0.25 percent is included in the total amount he or she pays for the ticket.

Federal taxes on cigarettes, alcohol, and gambling are sometimes referred to as “sin taxes” because the government uses them to increase the prices of potentially harmful goods and activities and, in theory, discourage customers from purchasing them.

The money the government needs to pay for parks and recreation comes, in part, from a tax on the sale of bows and arrows and fishing equipment. An example of this tax would be a sale of three lures, a fishing rod, and a fishing reel, which together cost $40. With an excise tax of 10 percent on the sale, the final total would be $40 plus $4 tax, or $44.00.

Recent Trends

Excise taxes that the government imposes during wartime are usually abolished when the war ends and the government’s need for the funds ceases. At the time of the Spanish-American War of 1898, Congress wanted to focus its collection of taxes on the wealthiest Americans. Telephone service was a luxury at the time, so affluent citizens were charged a 3 percent tax on every phone bill. After the war ended, the tax remained in existence, and over the following decades most American individuals and businesses began to use telephone service. The federal government brought in billions of dollars of income from the tax.

Many federal legislators and corporations sought to have the tax repealed, and several federal courts declared the tax illegal, but it was not until 2006 that the U.S. Department of the Treasury eliminated the tax and began to issue refunds for telephone tax payments made by individuals and businesses since 2003.