How an Excise Tax Works
Excise taxes are regressive because they impose the greatest financial burden on families that rely on or purchase a good number of these taxed items or services. These individuals are taxed 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. Some of these taxes are levied per unit, such as a flat fee per gallon of gasoline or a pack of cigarettes. Others are “ad valorem” excise taxes. They’re a percentage of what you spend rather than a flat fee. For example, you’ll pay a 10% excise tax for tanning services.
Examples of an Excise 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 June 2022, increasing to 24.4 cents per gallon of diesel fuel. President Biden called for a suspension of the tax at that time, through December 2023. But the legislation has stalled in Congress. 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 State paid $14.27 per gallon of distilled spirits as of January 2022.
Do I Have To Pay an Excise Tax?
Individuals don’t directly pay excise taxes to the federal government, but these ultimately 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 pay $4 for a gallon of gasoline. Most of that price is paid for the gasoline that went into your tank, but not all of it. A portion 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, the last year for which comprehensive statistics are available. 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%.
Types of Excise Taxes
This tax isn’t exclusively imposed by the U.S. federal government. All states and some municipalities levy some form of excise tax as well, although veterans, disabled individuals, or charitable organizations are exempt in some states. Boston imposed an excise tax of $25 per each $1,000 of value of all registered vehicles as of October 2022. That value is set by the Massachusetts Registry of Motor Vehicles. 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, is subject to federal excise taxes. States tend to focus their excise taxes on “fun” purchases rather than essentials like healthcare. These can include purchases such as alcohol, tobacco, candy, and gambling. But gasoline is subject to state-level excise taxes at times, too.
