Excise tax is a tax on specific goods or activities, not on income or property
An excise tax is a per-unit tax the federal government or a state charges on particular products or services. Unlike income tax (which taxes what you earn) or sales tax (which taxes most purchases), excise tax targets only certain items: gasoline, cigarettes, alcohol, airline tickets, fishing equipment, or indoor tanning services. The tax is built into the price you pay at the register or pump.
The federal government collects excise taxes on about 30 categories of goods and services. States add their own excise taxes on top of federal ones. A gallon of gasoline, for example, carries both a federal excise tax (18.4 cents per gallon as of 2024) and a state excise tax that varies by state. You do not see these as separate line items on your receipt—they are already included in the total price.
Excise taxes serve two purposes: they raise money for the government, and they discourage consumption of items the government considers harmful or wants to regulate. Taxes on cigarettes and alcohol are partly intended to reduce use. Taxes on gasoline fund highway maintenance and repair.
Key Takeaways
- Excise tax is charged on specific products like fuel, alcohol, and tobacco, not on most everyday purchases.
- The tax is included in the price you pay, so you may not see it listed separately on your receipt.
- Both the federal government and individual states impose excise taxes, and they stack on top of each other.
- Excise taxes fund specific programs: gasoline tax funds roads, alcohol tax funds alcohol regulation, and so on.
How excise tax differs from sales tax and income tax
Sales tax applies to most goods you buy—groceries, clothing, furniture—and is a percentage of the purchase price. Excise tax applies only to specific items and is usually a fixed amount per unit, not a percentage. A state sales tax might be 7 percent of everything; an excise tax on gasoline is a set number of cents per gallon, regardless of whether gas costs $2 or $4 per gallon.
Income tax is taken from your paycheck or owed when you file taxes. Excise tax is paid when you buy the product. You do not file paperwork for excise tax—the seller collects it and sends it to the government. If you buy a pack of cigarettes, the tax is already in the price the store charges you.
Excise taxes are also narrower in scope. Sales tax hits thousands of products; excise tax hits dozens. This narrow focus is intentional: the government uses excise tax to target items it wants to discourage or to fund programs related to that item.
What products and services have federal excise tax
The federal government charges excise tax on a defined list of goods and services. Fuel and transportation carry the largest share: gasoline, diesel, jet fuel, and airline tickets all have federal excise taxes. Alcohol and tobacco are heavily taxed—beer, wine, spirits, cigars, and cigarettes each have their own federal excise tax rate.
Other federal excise taxes apply to fishing rods and tackle, bows and arrows, firearms and ammunition, indoor tanning services, and certain medical devices. The rates vary widely. Gasoline carries 18.4 cents per gallon; the federal tax on cigarettes is $1.01 per pack as of 2024. Some items, like fishing equipment, carry a 10 or 11 percent excise tax on the purchase price.
A few excise taxes are temporary or tied to specific programs. For example, the Affordable Care Act imposed an excise tax on high-cost health insurance plans (though this has been delayed multiple times). The point is that the list is not fixed—Congress can add, remove, or change excise taxes through legislation.
State excise taxes add to the federal amount
Every state imposes its own excise taxes on top of federal ones. State excise taxes on gasoline range from about 8 cents per gallon to over 50 cents per gallon, depending on the state. State cigarette taxes range from 17 cents per pack to over $4 per pack. Some states tax alcohol more heavily than others; some tax diesel differently than gasoline.
When you buy gasoline in a state with a high excise tax, you are paying both the federal 18.4 cents and the state amount. A gallon of gas in one state might carry 40 cents in total excise tax; in another state, 60 cents. The pump price reflects both, but you will not see them broken out separately.
A few states do not impose income tax but rely more heavily on excise taxes and sales tax to fund government operations. These states often have higher excise taxes on fuel and tobacco to compensate.
Why the government uses excise tax
Excise taxes raise revenue for specific purposes. Federal gasoline tax funds the Highway Trust Fund, which pays for road construction and repair. Taxes on alcohol and tobacco fund regulation and public health programs related to those products. Taxes on fishing equipment fund fish and wildlife conservation programs.
Excise taxes also discourage consumption. A high tax on cigarettes makes smoking more expensive and may reduce the number of people who smoke or the amount they smoke. The same logic applies to alcohol and fuel. By making a product more expensive, the government can influence behavior without banning the product outright.
This is why excise taxes are sometimes called "sin taxes" when applied to alcohol and tobacco—they are intended to discourage behavior the government views as undesirable. Other excise taxes, like those on fuel, are more about funding infrastructure than changing behavior, though they do have that effect.
How much excise tax you actually pay
The amount of excise tax you pay depends on what you buy and where you live. If you buy a gallon of regular gasoline, you pay at least 18.4 cents in federal excise tax plus your state's rate. If you buy a pack of cigarettes, you pay $1.01 in federal tax plus your state's rate, which could add $1 to $4 more. If you buy an airline ticket, you pay 7.5 percent federal excise tax on the ticket price.
For most people, the largest excise tax burden comes from gasoline. If you drive 12,000 miles per year in a car that gets 25 miles per gallon, you buy about 480 gallons of gas annually. At a combined federal and state rate of 40 cents per gallon (a rough middle estimate), you pay about $192 per year in excise tax on fuel alone. Someone in a state with higher fuel taxes or who drives more will pay more.
Excise taxes are regressive, meaning they take up a larger share of income for lower-income households. A person earning $30,000 per year pays the same excise tax on gasoline as a person earning $300,000 per year, so the tax represents a larger burden for the lower-income person.
Frequently Asked Questions
Is excise tax the same as sales tax?
No. Sales tax applies to most purchases and is a percentage of the price. Excise tax applies only to specific items and is usually a fixed amount per unit. Excise tax is also intended to fund specific programs or discourage consumption, while sales tax is general revenue.
Why do some states have much higher excise taxes on gasoline than others?
States set their own excise tax rates based on their funding needs and policy goals. States with more road infrastructure to maintain often have higher fuel taxes. Some states also use excise taxes to replace income tax revenue. Rates change over time as states adjust them.
Can I avoid paying excise tax?
For most people, no. Excise tax is built into the price of the product, so you pay it when you buy. Some businesses may be exempt from certain excise taxes under specific circumstances, but individual consumers typically cannot avoid it.
Does excise tax go into the general government budget?
Not always. Some excise taxes are earmarked for specific purposes—gasoline tax funds highways, for example. Others go into the general fund. The law creating the excise tax determines where the money goes.
What happens if excise tax rates change?
When Congress or a state legislature changes an excise tax rate, the new rate applies to future purchases. The change is reflected in the price you pay at the pump or register. Rates can increase or decrease depending on legislation.