The excise tax was a federal tax on specific goods, not a tax on income or property
An excise tax is a tax placed on the sale of a particular product — not on you as a person, but on the thing itself. The federal government used excise taxes to raise money and, sometimes, to discourage people from buying certain items. Unlike income tax, which takes a percentage of what you earn, an excise tax adds a fixed amount or percentage to the price of goods at the point of sale.
The United States has used excise taxes since the 1790s. Some excise taxes still exist today — on gasoline, cigarettes, alcohol, and airline tickets, for example. Others were temporary, created to fund wars or specific government programs, then removed when they were no longer needed.
The key difference between an excise tax and a sales tax is who pays it and when. A sales tax is collected by the retailer at checkout and goes to the state or local government. An excise tax is often built into the wholesale price before the item reaches the store, and it goes to the federal government.
Key Takeaways
- An excise tax is a federal tax on a specific product, added to its price before or at the point of sale.
- Excise taxes have been used since the 1790s to raise federal revenue and sometimes to discourage consumption of certain goods.
- Common items subject to federal excise taxes include gasoline, cigarettes, alcohol, and airline tickets.
- An excise tax differs from a sales tax because it is federal, often collected at the wholesale level, and targets specific products rather than all purchases.
How an excise tax worked in practice
When an excise tax was in place on a product, the tax was usually collected from the manufacturer or distributor, not directly from you at the register. For example, if the federal government placed a 10-cent excise tax on a gallon of gasoline, the oil company would pay that tax to the government. The company then raised the price of gasoline to cover that cost, so you paid the tax indirectly when you filled up your tank.
Some excise taxes were collected at different points in the supply chain. A tax on alcohol might be collected from the brewery or distillery. A tax on airline tickets might be collected from the airline itself. The government set the tax rate, and businesses were responsible for calculating, collecting, and sending the money to the federal government on a regular schedule.
The amount of an excise tax could be a fixed dollar amount per unit (such as $0.50 per gallon) or a percentage of the sale price. A percentage-based excise tax meant that as prices rose, the tax amount rose too, without Congress having to pass a new law.
Why the government created excise taxes
Excise taxes served two main purposes. First, they raised money for the federal government without requiring an income tax. Before the income tax became permanent in 1913, excise taxes were one of the government's main sources of revenue. Taxes on alcohol, tobacco, and imported goods funded government operations and military spending.
Second, excise taxes were sometimes used as a tool to discourage behavior. A high tax on cigarettes or alcohol made those products more expensive, which reduced how much people bought. This approach is sometimes called a "sin tax" because it targets products the government considered harmful or wasteful. The idea was that the higher price would discourage consumption while also raising money from those who continued to buy.
During wartime, the government often created temporary excise taxes to pay for military operations. After the war ended, many of these taxes were removed. This happened after World War I, World War II, and the Korean War.
Excise taxes that still exist today
Several federal excise taxes remain in place. Gasoline and diesel fuel carry an excise tax of 18.4 cents per gallon (as of the most recent federal rate). Cigarettes are taxed at $1.01 per pack. Alcohol — beer, wine, and spirits — each have different excise tax rates. Airlines collect a federal excise tax on tickets, usually shown as a separate line item on your receipt.
Other products subject to federal excise taxes include fishing equipment, firearms and ammunition, indoor tanning services, and certain medical devices. Some of these taxes have been in place for decades; others were added more recently as part of healthcare or environmental legislation.
The revenue from these excise taxes goes into specific federal funds. Gasoline and diesel taxes, for example, fund the Highway Trust Fund, which pays for road construction and maintenance. Alcohol and tobacco taxes have historically funded general government operations, though some revenue now goes to healthcare programs.
Excise taxes that no longer exist
Many excise taxes have been repealed over the years. The federal government once taxed telephone service, but that excise tax was phased out between 2003 and 2006. There were excise taxes on luxury goods like furs and jewelry in the 1990s, but those were removed after a few years because they did not raise as much money as expected and were unpopular with businesses.
During the 2000s, there was a temporary excise tax on certain health insurance plans, though this was controversial and changed several times. The point is that excise taxes are not permanent — Congress can create them, modify them, or remove them depending on the government's revenue needs and political priorities.
How excise taxes differ from other types of taxes
| Tax Type | Who Pays | What It Taxes | Who Collects It |
|---|---|---|---|
| Excise Tax | Manufacturer or distributor (passed to consumer in price) | Specific products (gasoline, cigarettes, alcohol) | Federal government |
| Sales Tax | Consumer at point of sale | Most goods and services (varies by state) | State or local government |
| Income Tax | Individual or business based on earnings | Wages, profits, investment income | Federal government (and some states) |
| Property Tax | Property owner | Real estate and sometimes personal property | Local government |
Frequently Asked Questions
Is an excise tax the same as a sales tax?
No. A sales tax is collected at the register by the retailer and goes to state or local government. An excise tax is federal, collected from manufacturers or distributors, and applies only to specific products. You may pay both on a single purchase — for example, a sales tax on a pack of cigarettes plus the federal excise tax that was already built into the price.
Do I pay an excise tax when I buy gasoline?
Yes. The federal excise tax on gasoline is 18.4 cents per gallon. You do not see it listed separately on your receipt because it is included in the pump price. Many states also add their own excise or fuel tax on top of the federal rate.
Why did the government remove some excise taxes but keep others?
Excise taxes are removed when they stop raising enough money, become unpopular, or are no longer needed for their original purpose. Taxes on luxury goods were repealed because they did not generate expected revenue. Taxes on gasoline and alcohol remain because they raise substantial money and have broad political support for funding specific programs like road maintenance and healthcare.
Can a state create its own excise tax?
Yes. States can and do create excise taxes on products like gasoline, cigarettes, and alcohol. State excise taxes are separate from the federal excise tax, so you may pay both. Some states use excise taxes to fund specific programs, such as education or environmental protection.