An excise tax is a tax on the sale of a specific product, not on income or property
An excise tax is a per-unit or percentage tax added to the price of certain goods when you buy them. Unlike income tax (which is based on what you earn) or sales tax (which applies to most purchases), excise taxes target specific items the government wants to discourage or regulate. The tax is built into the price you pay at the register or pump.
The federal government and most states use excise taxes on fuel, alcohol, tobacco, and certain other products. Some cities and counties add their own excise taxes on top of the federal and state versions. When you buy a gallon of gasoline, a pack of cigarettes, or a bottle of beer, part of what you pay goes directly to the government as an excise tax.
Excise taxes differ from regular sales tax in one key way: they apply only to named products, not to everything you buy. A 7 percent sales tax applies to nearly all purchases in a store. An excise tax on cigarettes applies only to cigarettes, regardless of what else you buy that day.
Key Takeaways
- Excise taxes are added to specific products like gasoline, alcohol, and tobacco, not to all purchases or income.
- Federal excise tax rates are set by Congress and are the same nationwide, but states and cities can add their own excise taxes on top.
- The tax is usually included in the displayed price, so you may not see it as a separate line item on your receipt.
- Excise taxes are designed both to raise money for government and to discourage consumption of products considered harmful or wasteful.
Common products that have federal excise taxes
The federal government collects excise taxes on a defined list of products. Gasoline and diesel fuel carry a federal excise tax of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. These rates have not changed since 1993. The money goes into the Highway Trust Fund, which pays for road and bridge maintenance.
Alcohol products have federal excise taxes that vary by type. Beer is taxed at $11 per barrel (about 31 gallons). Wine ranges from $0.11 to $3.30 per gallon depending on the type. Spirits are taxed at $13.50 per gallon. These rates also have not changed since the early 1990s.
Tobacco products carry federal excise taxes of $1.0066 per pack of cigarettes (20 cigarettes) and varying rates on cigars, smokeless tobacco, and pipe tobacco. The cigarette tax was last raised in 2009. Firearms and ammunition, air travel, telephone services, and certain medical devices also carry federal excise taxes, though at lower rates than fuel or tobacco.
How state and local excise taxes add to the federal amount
Every state except Alaska, Delaware, Montana, New Hampshire, and Oregon collects its own excise tax on gasoline. State rates range from about 6 cents per gallon to over 50 cents per gallon, depending on the state. Some states adjust their rates annually based on inflation or road maintenance needs. When you fill your tank, you pay the federal 18.4 cents plus your state's rate plus any local tax your city or county adds.
States also tax alcohol and tobacco at their own rates, which are often higher than the federal tax. A pack of cigarettes might carry a federal tax of $1.01, a state tax of $1.50 to $4.50, and a local tax of up to $1.50 more, depending on where you live. The total tax can be more than half the retail price in high-tax states and cities.
Some cities and counties have begun adding excise taxes on sugary drinks, cannabis products, and other items. These local taxes are separate from state and federal taxes and vary widely by location. You can find your state's current excise tax rates on the state revenue or taxation department website.
Why governments use excise taxes instead of other taxes
Excise taxes serve two purposes: they raise money for government, and they discourage people from buying products considered harmful or wasteful. The federal fuel excise tax funds highway maintenance. The tobacco tax is intended to reduce smoking, especially among young people. Alcohol taxes are meant to offset public health and safety costs related to drinking.
Excise taxes are also politically easier to raise than income tax or sales tax. A politician can propose a tax on cigarettes without affecting most voters, whereas raising income tax affects everyone. This makes excise taxes a common choice when governments need revenue without broad public opposition.
Some economists argue that excise taxes are regressive — they take a larger percentage of income from lower-income households than from wealthy ones. A person earning $25,000 per year spends a larger share of their income on gasoline and cigarettes than someone earning $100,000. This is one reason excise taxes are controversial.
The difference between per-unit and percentage excise taxes
Excise taxes are structured in two ways. A per-unit tax (or specific tax) is a fixed dollar amount per item. The federal gasoline excise tax is 18.4 cents per gallon, no matter what the price of gas is. The federal cigarette tax is $1.0066 per pack. These amounts stay the same year to year unless Congress votes to change them.
An ad valorem tax is a percentage of the price. Some state alcohol taxes are structured this way — for example, a state might tax beer at 10 percent of the retail price. If beer costs $10 per six-pack, the tax is $1. If the price rises to $12, the tax rises to $1.20. Ad valorem taxes automatically adjust when prices change, whereas per-unit taxes do not.
Most federal excise taxes are per-unit taxes, which means they do not keep pace with inflation. The federal gasoline tax of 18.4 cents per gallon has been the same since 1993, even though the price of gas has risen significantly. Some states use ad valorem taxes to ensure their revenue keeps up with inflation.
How excise tax revenue is used
Federal excise tax revenue goes into specific funds designated by law. Fuel excise taxes fund the Highway Trust Fund and the Aquatic Resources Trust Fund. Alcohol and tobacco taxes go into the general Treasury. Excise taxes on firearms and ammunition fund wildlife conservation programs. The tax is earmarked for a specific purpose, not mixed into general government spending.
State excise tax revenue is typically dedicated to specific uses as well. Many states dedicate fuel excise tax revenue to road maintenance and construction. Some states use tobacco tax revenue for public health programs or education. A few states have dedicated cannabis excise tax revenue to drug treatment or community reinvestment programs.
In practice, the amount of excise tax revenue collected often falls short of the stated purpose. The federal fuel tax has not been raised since 1993, but road maintenance costs have risen. Many states face shortfalls in their highway funds and have had to raise excise tax rates or find other revenue sources.
Frequently Asked Questions
Is the excise tax included in the price shown on the pump or shelf?
Yes. The excise tax is built into the price you see. For gasoline, the pump price includes the federal and state excise taxes. For cigarettes and alcohol, the shelf price includes all applicable taxes. You do not pay the excise tax on top of the displayed price — it is already included.
Can I get a refund or exemption from excise tax?
Most consumers cannot. However, certain businesses and organizations may be exempt from excise taxes on specific products. For example, farmers can sometimes buy diesel fuel without the federal excise tax if they use it for farm equipment. Exemptions are narrow and require documentation. Contact your state revenue department to learn whether your situation qualifies.
Why do excise tax rates vary so much between states?
Each state sets its own excise tax rates based on its budget needs and policy goals. States with higher road maintenance costs or more aggressive public health goals tend to have higher excise taxes. States also compete with neighboring states — if one state's gas tax is much higher, drivers may cross the border to fill up, which influences rate-setting decisions.
Do excise taxes ever go down?
Rarely. The federal excise tax rates on gasoline, alcohol, and tobacco have not been lowered in decades. Some states have frozen their rates or reduced them temporarily during economic downturns, but permanent reductions are uncommon. Governments tend to raise excise taxes when they need revenue, not lower them.
How much of the price I pay is excise tax?
It depends on the product and your location. On a gallon of gasoline, excise taxes typically account for 15 to 50 cents of the price, depending on your state. On a pack of cigarettes, excise taxes can be $2 to $6 of the retail price. On a beer, excise taxes are usually less than 50 cents per unit. Check your state revenue department website for current rates in your area.