Excise Tax

Excise taxes are taxes imposed on certain types of items or groups of goods by the government (federal, state, or local). Unlike sales taxes, excise taxes are typically included in the price of the goods, so it is less apparent to consumers that a tax is being paid. Excise taxes may be imposed as social measures, such as a tax on packs of cigarettes, or may tie the consumption of certain goods to certain public efforts, such as a tax on gasoline to pay for improvement of roads.

How Are Excise Taxes Imposed and Collected?

Excise taxes are different from other forms of taxes placed on goods because they are not added on, at the end, to the consumer’s total purchase. Rather, they are imposed on the good itself. This means that the owner of the good, such as a store owner or manufacturer typically pays the excise tax and includes this cost in its pricing of the good, thereby indirectly passing the cost on to the consumer. Thus, for instance, if a gallon of gas costs $2.50, but an excise tax is imposed of .25 cents per gallon, the producer will pay that tax upfront, but likely pass the cost along to the consumer by raising the cost of gas to $2.75.  Although the end result is the same, this makes the tax slightly more hidden to the consumer because it does not appear on a receipt as a separate line item.  Notably, this means that if a consumer also pays a sales tax for a product, they are, in actuality, paying a tax upon a tax if an excise tax is included in the price of the product.

Excise taxes are collected by producers and retailers; they are the ones who must pay the tax to the Internal Revenue Service, or any state or local government that has imposed an excise tax.

Creation of Excise Taxes

Excise taxes are generally passed either through congressional effort, or by state and local efforts to pass new tax laws. They are typically used to accomplish two goals: to raise money for various public efforts and to discourage certain public behaviors. This is apparent in many of the goods that are subject to excise taxes, which include:

  • Cigarettes
  • Whiskey
  • Firearms
  • Gasoline
  • Indoor Tanning

Relief from excise taxes can also be used to encourage the promotion of desirable behavior. For instance, while gasoline may be subject to an excise tax, fuel credits are extended to those who use alternative fuels such as biodiesel.

Because of the wide breadth of excise taxes, not all excise tax enforcement is conducted by the Internal Revenue Service. Rather, the Bureau of Alcohol, Tobacco, Firearms, and Explosives is responsible for the enforcement of all excise taxes on products within its jurisdiction, such as cigarettes. Accordingly, it frequently prosecutes black-market efforts to avoid excise taxes through under-the-counter trade of goods such as alcohol. Other excise taxes, such as taxes on transportation-related activities, are enforced and collected by the Internal Revenue Service.