Excise tax is a tax on specific goods or activities, not on income or property
An excise tax is a tax placed on the sale or use of a particular product or service. Unlike income tax (which taxes what you earn) or sales tax (which taxes most purchases), excise tax targets only certain items. The federal government and most states use excise taxes to raise money and sometimes to discourage consumption of products they consider harmful or wasteful.
The tax is usually built into the price you pay at the register, so you may not see it as a separate line item. When you buy gasoline, cigarettes, alcohol, or airline tickets, you are paying excise tax as part of that purchase. Some excise taxes are paid by the manufacturer or distributor rather than the consumer, but the cost is typically passed along in the final price.
Key Takeaways
- Excise tax is a tax on specific products like fuel, tobacco, alcohol, and airline tickets, not a general tax on all purchases.
- The federal government and states both impose excise taxes, and the rates vary by product and location.
- Excise taxes are often included in the price you see, so you may not notice them as a separate charge.
- Some excise taxes exist partly to discourage use of products considered harmful, while others simply raise government revenue.
Common products and services that have excise tax
Gasoline and diesel fuel carry federal excise tax of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel, plus additional state taxes that vary. Cigarettes and smokeless tobacco are taxed at the federal level and by most states. Alcohol — beer, wine, and spirits — is taxed differently depending on the type and alcohol content.
Other items with federal excise tax include airline tickets, fishing equipment and tackle, firearms and ammunition, and indoor tanning services. Some states add their own excise taxes on items like vaping products, sugary drinks, or recreational marijuana. The list changes over time as lawmakers add or remove taxes based on policy goals.
Why excise taxes exist
Governments use excise taxes for two main reasons. First, they raise money for specific purposes — for example, the federal fuel tax funds highway and bridge maintenance. Second, they discourage consumption of products considered harmful or wasteful. Tobacco and alcohol taxes are partly intended to reduce smoking and drinking by making these products more expensive.
Excise taxes are sometimes called "sin taxes" when they target products like cigarettes or alcohol. The idea is that people who choose to use these products should bear the cost of any public health or social impact. Whether this actually reduces consumption varies by product and by how high the tax is set.
How excise tax differs from sales tax
Sales tax applies to almost everything you buy — groceries, clothing, electronics, services. It is a percentage of the purchase price and varies by state and sometimes by city. Excise tax, by contrast, applies only to specific items and is often a fixed amount per unit rather than a percentage.
A gallon of gasoline might have 18.4 cents of federal excise tax plus your state's excise tax, regardless of whether gas costs $2 or $4 per gallon. A pack of cigarettes has a specific federal tax per pack, plus state tax. Sales tax, meanwhile, is calculated as a percentage — if your state sales tax is 7%, you pay 7% on top of the price of almost any item you buy.
Federal versus state excise taxes
The federal government imposes excise taxes on fuel, alcohol, tobacco, firearms, and several other products. These taxes are the same nationwide. States can and do add their own excise taxes on top of federal ones, and state rates vary widely. Some states tax cigarettes at much higher rates than others; some states tax gasoline more heavily to fund local roads.
When you buy a product with excise tax, you may be paying both federal and state tax. For example, a gallon of gasoline includes the 18.4-cent federal excise tax plus your state's excise tax, which could range from a few cents to over 50 cents per gallon depending on where you live. The total excise tax you pay depends on which state you are in and what you are buying.
Who actually pays the excise tax
Legally, excise tax can be imposed on either the manufacturer, distributor, or the consumer — it depends on the product and the tax. In practice, the cost usually ends up with the consumer because businesses pass the tax along in their prices. A cigarette manufacturer pays federal excise tax to the government, but that cost is built into the price you pay at the store.
Some excise taxes are collected at the wholesale level before a product reaches a store. Others are collected at the point of sale. From the consumer's perspective, the distinction usually does not matter — you pay the total price, which includes the excise tax, whether or not you see it broken out separately on your receipt.
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 products like fuel or cigarettes and is often a fixed amount per unit. You pay both on some items — for example, when you buy gasoline, you pay excise tax plus sales tax.
Why is excise tax on gasoline so high?
The federal fuel excise tax funds highway and bridge maintenance and repair. States add their own fuel taxes for the same reason. The tax has not changed since 1993, so while it was substantial then, inflation has reduced its purchasing power over time.
Can I avoid paying excise tax?
Excise tax is built into the price of taxed products, so you cannot avoid it if you buy those items. You can reduce your excise tax burden by buying fewer taxed products — for example, driving less, buying less fuel, or not purchasing cigarettes or alcohol.
Do all states have the same excise tax rates?
No. Federal excise taxes are the same everywhere, but states set their own rates. Cigarette taxes, for example, range from under $1 per pack in some states to over $4 in others. Fuel taxes also vary significantly by state.