An excise tax is a tax on a specific product or activity, not on income or property
An excise tax is a tax the government places on the sale or use of a particular item or service. Unlike income tax, which applies to what you earn, or sales tax, which applies to most things you buy, an excise tax targets one specific thing — gasoline, cigarettes, alcohol, airline tickets, or fishing licenses, for example.
The tax is usually built into the price you see at the register. You do not pay it separately; it is already included. The seller collects it and sends it to the government. Because the tax is hidden in the price, many people do not notice they are paying it.
Excise taxes exist at the federal level and at state and local levels. A gallon of gasoline, for instance, carries both a federal excise tax and a state excise tax. The total amount you pay varies by location and by product.
Key Takeaways
- An excise tax targets a specific product or activity, not income or general purchases.
- The tax is included in the price you pay, so you may not see it as a separate line item.
- Federal, state, and local governments all use excise taxes, and the rates vary by location and product.
- Excise taxes are often used to discourage certain behaviors or to fund specific programs related to that product.
- Common items with excise taxes include gasoline, alcohol, tobacco, and airline tickets.
Why governments use excise taxes
Governments use excise taxes for two main reasons: to raise money and to discourage certain behaviors. A high tax on cigarettes, for example, makes them more expensive and may persuade some people to smoke less. The money collected also funds public health programs.
Excise taxes on gasoline fund road maintenance and public transportation. Taxes on alcohol help pay for substance abuse treatment and prevention. In this way, the tax is often tied to the cost of managing the consequences of that product or activity.
Some excise taxes are purely about raising revenue. A tax on airline tickets or hotel stays, for instance, simply brings money into the government budget. There is no public health or safety goal — it is just a way to fund government operations.
Common products and activities with excise taxes
Gasoline and diesel fuel carry federal excise taxes of 18.4 cents and 24.4 cents per gallon respectively. States add their own tax on top of that, ranging from about 8 cents to over 50 cents per gallon depending on the state.
Alcohol — beer, wine, and spirits — is taxed at the federal level and by most states. The federal tax varies by type of alcohol and strength. A six-pack of beer, for example, carries a federal excise tax of about 11 cents per gallon of beer produced.
Cigarettes and smokeless tobacco carry federal excise taxes, and nearly every state adds its own. Federal tax on cigarettes is $1.01 per pack; state taxes range from 17 cents to over $4.50 per pack.
Other items with excise taxes include airline tickets, fishing and hunting licenses, firearms and ammunition, indoor tanning services, and certain medical devices. Some states tax sugary drinks. The list varies by state and changes over time as governments add or remove taxes.
How excise tax rates are set and change
Federal excise tax rates are set by Congress and written into law. They do not change automatically. The federal gasoline tax, for example, has been 18.4 cents per gallon since 1993 — it has not been raised in over 30 years, even as inflation has eroded its value.
State excise taxes are set by state legislatures and vary widely. Some states raise their excise tax rates regularly; others rarely change them. A state might raise the tax on cigarettes to fund a specific health program or to discourage smoking.
When a tax rate changes, the change is usually announced in advance and takes effect on a specific date. For gasoline and alcohol, the change typically happens at the pump or on the shelf price within days. For products like cigarettes, retailers may have a grace period to sell existing inventory before the new tax applies.
The difference between excise tax and sales tax
Sales tax applies to most things you buy and is a percentage of the purchase price — typically 5 to 10 percent depending on your state and city. Excise tax applies to one specific product and is usually a fixed amount per unit, not a percentage.
A gallon of gasoline might have an 18-cent federal excise tax plus a state excise tax of 30 cents, for a total of 48 cents per gallon. On top of that, you may also pay sales tax on the entire purchase. The excise tax and sales tax are separate.
Excise taxes are also more visible in some cases. When you buy gasoline, the pump often shows the excise tax separately. When you buy a pack of cigarettes, the tax is usually hidden in the total price. With sales tax, it is almost always added at checkout and shown on the receipt.
Who actually pays the excise tax
You pay the excise tax when you buy the product. The seller collects it and sends it to the government. From your perspective, you simply pay the price on the shelf or pump — the tax is already included.
In some cases, the manufacturer or distributor pays the excise tax first, then passes the cost to the retailer, who passes it to you. The end result is the same: the tax is built into the price you pay.
Excise taxes are sometimes called "sin taxes" when they target products like alcohol or tobacco, because the burden falls on the people who use those products. People who do not smoke or drink do not pay those taxes. This is different from income tax or property tax, which everyone in a certain income bracket or property-owning category pays.
Frequently Asked Questions
Is excise tax the same as sales tax?
No. Sales tax is a percentage of the purchase price and applies to most things you buy. Excise tax targets one specific product and is usually a fixed amount per unit. Both can apply to the same purchase — for example, you pay excise tax on gasoline plus sales tax on the total.
Why is excise tax hidden in the price?
Excise tax is built into the price by law. The seller collects it and sends it to the government. At the gas pump, the excise tax is sometimes shown separately. For cigarettes and alcohol, it is usually included in the shelf price without a separate line item.
Can excise tax rates change?
Yes. Federal rates are set by Congress and change only when Congress passes a new law. State rates are set by state legislatures and can change more frequently. When a rate changes, it usually takes effect on a specific date announced in advance.
Do I pay excise tax on everything I buy?
No. Excise tax applies only to specific products and activities — gasoline, alcohol, tobacco, airline tickets, and a few others. Most everyday items like groceries, clothing, and household goods do not have a federal excise tax, though some states may tax specific items.
Where does the money from excise taxes go?
It goes into the government budget. Some excise taxes are earmarked for specific purposes — for example, gasoline taxes fund road maintenance. Others go into the general fund. The use of the money depends on how the law that created the tax was written.