Excise tax is a tax on specific goods, not on income or property
An excise tax is a tax the federal government or a state charges on the sale of certain products. Unlike income tax, which is based on what you earn, or sales tax, which applies to most things you buy, excise tax targets particular items. The tax is usually built into the price you pay at the register — you often do not see it listed separately.
The federal government uses excise tax to discourage consumption of products it considers harmful or to raise money for specific programs. Gasoline, diesel, cigarettes, alcohol, and airline tickets all carry federal excise taxes. Some states add their own excise taxes on top of the federal ones. A few products, like certain medical devices, are taxed at the federal level but not by states.
The amount of excise tax varies by product and changes over time. Gasoline carries a federal excise tax of 18.4 cents per gallon for regular gas and 24.4 cents per gallon for diesel, but that rate has not changed since 1993. Cigarettes carry a federal tax of $1.01 per pack, set in 2009. States set their own rates, which can be much higher.
Key Takeaways
- Excise tax is charged on specific products like fuel, alcohol, and cigarettes, not on most everyday purchases.
- The federal government sets one rate, and states can add their own excise tax on top, so the total tax varies by location.
- Excise tax is usually included in the price you see, so you pay it without a separate line item on your receipt.
- The money from excise tax goes to federal or state budgets, and sometimes to specific programs like highway maintenance or public health.
Which products have federal excise tax
The federal government taxes a defined list of goods. Gasoline and diesel fuel carry the longest-standing federal excise tax. Alcohol — beer, wine, and spirits — each have different federal tax rates per unit. Cigarettes and smokeless tobacco are taxed per pack or per pound. Airline tickets, heavy trucks, fishing equipment, and certain vaccines also carry federal excise taxes.
Medical devices became subject to federal excise tax in 2013, though Congress has suspended that tax multiple times. Betting and wagering, indoor tanning services, and coal are also on the federal list. The rates and which products are taxed can change when Congress passes new legislation, but this happens infrequently.
Not every state taxes the same products. Most states tax gasoline and alcohol, but the rates differ. Some states tax cigarettes at rates far higher than the federal tax. A few states do not tax certain products at all — for example, some states do not tax groceries or prescription medications, though these are not typically subject to federal excise tax either.
How much excise tax you actually pay
The amount you pay in excise tax depends on what you buy and where you live. For gasoline, the federal tax is fixed, but state taxes range from about 8 cents per gallon in Alaska to over 60 cents per gallon in some states. When you fill up, you pay both the federal and state excise tax, though the pump price usually shows only the total.
For cigarettes, the federal tax is $1.01 per pack, but state taxes vary dramatically. New York charges $4.35 per pack on top of the federal tax, while Missouri charges 17 cents per pack. A single pack of cigarettes can cost $3 more or less depending on which state you buy it in, and much of that difference is excise tax.
Alcohol excise taxes are calculated per unit — per gallon of beer, wine, or spirits — rather than per dollar spent. This means the tax rate does not change based on the price of the product. A cheap beer and an expensive craft beer carry the same federal excise tax per ounce, even though the craft beer costs more.
Where the money from excise tax goes
Federal excise tax revenue goes into the general U.S. Treasury, but some is earmarked for specific programs. Gasoline and diesel excise taxes fund the Highway Trust Fund, which pays for road construction and maintenance. Alcohol and tobacco taxes sometimes fund public health programs, though the money often goes to general revenue instead.
State excise tax revenue typically goes into the state general fund or into programs the state legislature designates. Some states dedicate cigarette tax revenue to smoking cessation programs or Medicaid. Others use it for schools or transportation. The way the money is spent depends on each state's budget decisions.
The federal government does not use excise tax primarily to raise money — it raises far more from income tax. Instead, excise tax serves two purposes: to discourage consumption of products considered harmful, and to make users of certain services pay for the infrastructure those services require. Gasoline users pay for roads; airline passengers pay for airport security and air traffic control.
Excise tax versus sales tax and income tax
These three taxes work differently and apply to different things. Sales tax is a percentage of the purchase price and applies to most goods and services you buy — groceries, clothing, electronics. The rate is usually between 4 and 10 percent depending on your state and county. You see sales tax added at checkout.
Income tax is based on the money you earn from work or investments. The federal government charges income tax at rates that increase with your income. Most states also charge income tax. You pay income tax through payroll withholding or by filing a tax return.
Excise tax is a fixed amount per unit of a specific product, not a percentage of price. It is built into the price before you see it. You do not pay excise tax on most things you buy — only on the products the government has decided to tax. A gallon of gasoline carries excise tax; a gallon of milk does not.
Why the government uses excise tax
Excise tax serves as a tool to discourage consumption of products the government considers harmful or to fund programs related to those products. Cigarette and alcohol taxes are intended to reduce smoking and drinking by making these products more expensive. The higher the tax, the more expensive the product becomes, and some people buy less as a result.
Gasoline excise tax is not primarily about discouraging driving — it is about making drivers pay for the roads they use. The tax funds highway maintenance and construction. Similarly, airline ticket taxes fund airport security and air traffic control systems. In these cases, excise tax is a way to connect the cost of infrastructure to the people who use it.
Excise tax can also raise revenue for specific public health or safety programs. Tobacco taxes sometimes fund smoking cessation programs or cancer research. Alcohol taxes may fund drunk driving prevention or treatment programs. The connection between the tax and the program is not always direct, but the intent is to tie the tax to a related purpose.
Frequently Asked Questions
Do I pay excise tax on everything I buy?
No. Excise tax applies only to specific products the government has decided to tax: gasoline, diesel, cigarettes, alcohol, airline tickets, and a few others. Most everyday purchases like groceries, clothing, and household items do not carry excise tax. You pay sales tax on those instead.
Why is excise tax not shown separately on my receipt?
Excise tax is usually included in the price before you buy the item. For gasoline, the pump shows the total price per gallon, which includes federal and state excise tax. For cigarettes and alcohol, the shelf price includes the tax. The retailer collects the tax and sends it to the government, but you do not see it broken out as a line item.
Can excise tax rates change?
Federal excise tax rates change only when Congress passes new legislation, which happens infrequently. The gasoline excise tax has been 18.4 cents per gallon since 1993. States can change their excise tax rates more often through state legislation. Some states raise cigarette or alcohol taxes every few years; others keep rates the same for decades.
Is excise tax the same in every state?
No. The federal excise tax is the same everywhere, but states add their own excise taxes on top. Gasoline excise tax ranges from about 8 cents per gallon in Alaska to over 60 cents per gallon in some states. Cigarette taxes vary even more widely. The total excise tax you pay depends on both the federal rate and your state's rate.
Who pays excise tax — the business or the customer?
Legally, the business is responsible for collecting and sending excise tax to the government. In practice, the cost is passed to you through higher prices. You pay excise tax every time you buy a taxed product, whether you see it listed separately or not.