An excise tax is a type of tax that is applied to a specific commodity or type of goods, such as cigarettes, gasoline, and alcoholic beverages. While the excise tax is assessed on and paid by the manufacturer, the actual tax burden is usually passed along to the consumer by incorporating the amount of the excise tax into the final selling price of the product. Excise taxes are assessed in the United States by federal and state governments as well as by local governments when permitted by state law, often on the same commodities.
In the United States excise taxes are usually assessed on a per unit basis (e.g., per gallon of gasoline, per package of cigarettes). In some cases the excise tax may be an ad valorem tax, or one that is a fixed percentage of the selling price. The excise tax is typically paid by purchasing tax stamps from the government, which must then be affixed to the product before it can be sold. The tax stamps affixed to alcoholic beverages and packages of cigarettes indicate that the excise taxes have been paid by the manufacturer.
Like other sales taxes, an excise tax is generally considered regressive. That is, individuals and families with lower incomes pay a greater proportion of their income toward such taxes than people with higher incomes. Products that have excise taxes levied on them—such as cigarettes, gasoline, and alcoholic beverages—generally account for a declining percentage of individual or family expenditures as incomes rise. In most cases, the amount of the tax is incorporated into the product's final selling price and is ultimately paid for by the consumer.
Because of the regressive nature of excise taxes, governments may be reluctant to use them unless they serve some legitimate social or economic purpose. Excise taxes are frequently used to limit consumption of a product and to regulate consumer behavior. Goods such as cigarettes and alcoholic beverages carry a high level of excise tax, since it is considered socially beneficial to limit their consumption. Similarly, legal gambling activities frequently have an excise tax, in part because it is considered desirable to limit such activities. Excise taxes that are designed to discourage consumption of a particular commodity for the benefit of society are known as sumptuary taxes, or more commonly as "sin taxes."
Excise taxes that are applied to gasoline are not designed to limit consumption. Such taxes are typically applied to the building and maintenance of highways and roads, although in some states a portion of fuel taxes are allocated to public education. This type of excise tax can easily be justified as a user charge on the basis of the benefit principle. It is reasoned that only those individuals who benefit from road and highway construction and maintenance have to pay the gasoline excise tax.
Another example of the benefit principle are the excise taxes paid by hunters and fishers to fund state fish and wildlife agencies. Starting in the late 1930s, hunters began paying excise taxes on ammunition and firearms, with the tax revenues automatically appropriated to state fish and wildlife agencies. These taxes had the full support of America's hunters and ammunition manufacturers, who were eager to revitalize wildlife populations. In the 1950s fishers began paying excise taxes on fishing gear to fund state fisheries programs. Under an expanded program in the 1980s, about $250 million per year went to state fish and game departments.
Excise taxes are an important but declining source of revenue for state governments in the United States. The three major sources of state tax revenue—general sales taxes, excise taxes, and individual income taxes—accounted for approximately 80 percent of state tax revenue in 1989, with corporate income and other taxes accounting for the remaining 20 percent. Of those, excise taxes accounted for approximately 16 percent of state tax revenue, with general sales taxes accounting for 33 percent and individual income taxes accounting for approximately 31 percent. By comparison, excise taxes account for only 5 percent of federal tax revenue and 3 percent of local government tax revenue.
The trend in state tax revenue since World War II has been for individual income taxes and general sales taxes to account for an increasing percentage of state tax revenue relative to excise taxes. In 1948, for example, excise taxes accounted for 38 percent of all state tax revenue, with general sales taxes contributing 22 percent and individual income taxes contributing approximately 7.5 percent. Since that time, sales and individual income taxes have grown to become more significant revenue sources, leaving excise taxes to account for a smaller portion of state tax revenue.
[ David P. Bianco ]
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