Excise tax is a tax on specific goods or activities, not on income or property
An excise tax is a per-unit or percentage tax placed on particular products or services. Unlike income tax or property tax, which apply broadly, excise tax targets specific items: gasoline, cigarettes, alcohol, airline tickets, fishing equipment, or indoor tanning. The tax is usually built into the price you pay at the register, so you may not see it as a separate line item.
The federal government and most states both impose excise taxes. A gallon of gasoline, for example, carries a federal excise tax of 18.4 cents per gallon, plus a state tax that varies by state. A pack of cigarettes includes federal excise tax plus state and sometimes local excise tax. The total you pay depends on where you live and what you buy.
Excise taxes serve two purposes: they raise revenue for government, and they discourage consumption of items lawmakers consider harmful or wasteful. Taxes on cigarettes and alcohol are partly intended to reduce use. Taxes on fuel fund highway maintenance. Taxes on fishing tackle support wildlife conservation.
Key Takeaways
- Excise tax is charged on specific products like fuel, cigarettes, alcohol, and airline tickets, not on all purchases or income.
- Both the federal government and individual states impose excise taxes, and the total amount varies by location and product.
- Excise taxes are usually included in the price you see, so you pay them without a separate checkout line.
- The tax rate depends on the item: some are a flat amount per unit (like 18.4 cents per gallon of gas), others are a percentage of the sale price.
How excise tax is calculated and collected
Excise taxes work in two ways: per-unit taxes and ad valorem taxes. A per-unit tax is a fixed dollar amount on each item. Federal excise tax on gasoline is 18.4 cents per gallon, regardless of whether gas costs $2 or $4 per gallon. Federal excise tax on cigarettes is $1.01 per pack. The tax stays the same; the price of the product changes.
An ad valorem excise tax is a percentage of the sale price. Some states charge excise tax on hotel rooms as a percentage of the nightly rate. If a hotel room costs $100 and the excise tax is 5 percent, you pay $5 in excise tax. If the room costs $200, you pay $10.
The seller or manufacturer collects the tax and sends it to the government. You do not file a separate form or claim the tax on your tax return. The tax is embedded in the price. When you buy a gallon of gas, the station owner has already paid the federal excise tax to the IRS and the state excise tax to the state revenue department. The price displayed includes those taxes.
Common items that carry federal excise tax
Federal excise taxes apply to a long list of goods and services. The most visible are fuel (gasoline and diesel), cigarettes, smokeless tobacco, and alcohol (beer, wine, and spirits). Each has a different rate. Gasoline is taxed at 18.4 cents per gallon. Cigarettes are taxed at $1.01 per pack of 20. Beer is taxed at $11 per barrel (about 31 gallons).
Less obvious excise taxes cover airline tickets, fishing equipment, firearms and ammunition, indoor tanning services, and certain medical devices. A small excise tax on medical devices (like pacemakers or artificial joints) was imposed to help fund health insurance programs. Excise taxes on firearms and ammunition fund wildlife conservation. The rates and rules for each differ.
Some excise taxes are temporary or tied to specific programs. During the COVID-19 pandemic, the federal government imposed a temporary excise tax on certain imported goods. Some excise taxes sunset after a set number of years unless Congress renews them. The list of taxed items and the rates change when Congress passes new tax law.
State and local excise taxes vary widely
Every state imposes its own excise taxes, and the rates differ significantly. State excise tax on gasoline ranges from about 8 cents per gallon to over 60 cents per gallon, depending on the state. State excise tax on cigarettes ranges from under $0.20 per pack to over $4.50 per pack. A pack of cigarettes that costs $5 in one state might cost $10 in another, largely because of excise tax differences.
Some states tax items the federal government does not. A few states impose excise tax on soft drinks or sugary beverages. Some tax marijuana (where it is legal). Others tax hotel rooms, rental cars, or prepared food. Local governments sometimes add their own excise taxes on top of state and federal taxes. A hotel room in a city with local tourism taxes can carry three layers of excise tax.
Because rates vary by state and locality, the total excise tax you pay depends on where you live and where you make the purchase. Buying gasoline in a state with high fuel excise tax costs more than buying the same gallon in a state with low fuel excise tax. This is why people near state borders sometimes travel to buy items in lower-tax states.
Why governments use excise tax instead of other taxes
Excise taxes are popular with lawmakers for several reasons. They raise revenue without taxing income or property, which are politically sensitive. They target specific groups of consumers rather than everyone. A person who does not smoke or drink avoids cigarette and alcohol excise taxes entirely. A person who drives a lot pays more fuel excise tax than someone who does not.
Excise taxes also discourage behavior lawmakers want to reduce. High taxes on cigarettes make smoking more expensive and can reduce consumption, especially among price-sensitive groups like teenagers. Taxes on fuel encourage fuel efficiency and can reduce driving. Taxes on alcohol raise the cost and may reduce heavy drinking. Whether these taxes actually change behavior is debated, but the intent is clear.
Excise taxes also fund specific programs. Federal fuel excise tax goes into the Highway Trust Fund, which pays for road construction and maintenance. Federal taxes on fishing equipment and firearms fund wildlife conservation programs. Tying a tax to a specific use makes it easier to justify the tax to the public and to allocate the money.
How excise tax differs from sales tax and income tax
Sales tax applies to most goods and services you buy. It is a percentage of the purchase price and varies by state and locality, usually between 4 and 10 percent. You pay sales tax on groceries, clothing, electronics, and most other items. Excise tax applies only to specific items and is in addition to sales tax. You pay both sales tax and excise tax on a pack of cigarettes or a gallon of gas.
Income tax is a tax on the money you earn. The federal government and most states impose income tax. You pay it through payroll withholding or quarterly estimated payments. Excise tax is not based on your income; it is based on what you buy. Two people with the same income pay different amounts of excise tax if one smokes and the other does not.
A simple example: you buy a pack of cigarettes for $7. The pack might include $1.01 in federal excise tax, $1.50 in state excise tax, and $0.45 in sales tax. The remaining $4.04 is the manufacturer's and retailer's profit and cost. You pay three different taxes on one item, each calculated differently and going to different government bodies.
Frequently Asked Questions
Can I deduct excise tax on my tax return?
Most excise taxes cannot be deducted on your personal tax return. However, if you own a business and buy fuel or other taxed items for business use, you may be able to deduct or claim a credit for some excise taxes. The rules depend on the type of business and the type of tax. Consult a tax professional about your specific situation.
Why is excise tax not shown separately on my receipt?
Excise tax is usually included in the price displayed and charged to you, so it does not appear as a line item. For gasoline, the price per gallon shown at the pump already includes federal and state excise tax. For cigarettes and alcohol, the shelf price includes excise tax. Some receipts do break out excise tax, but most do not.
Do I pay excise tax if I buy something online?
It depends on the item and where you live. Excise taxes on fuel and cigarettes apply whether you buy in person or online, because the tax is tied to the product itself. However, online sellers do not always collect state excise taxes on other items. Rules vary by state and are still evolving as online commerce grows.
What happens to the money from excise taxes?
Federal excise tax revenue goes to the U.S. Treasury and is allocated by Congress. Some is earmarked for specific programs, like the Highway Trust Fund for fuel taxes. State and local excise tax revenue goes to state and local governments and is used for general revenue or specific programs, depending on state law.