What Are Excise Goods and Why Are They Taxed?

Excise goods are a distinct category of products or services subject to a specific type of indirect tax. This taxation mechanism plays a notable role in government revenue streams and policy objectives, impacting consumer prices and public health initiatives.

What Defines Excise Goods

Unlike sales tax, which is typically a percentage added at the point of retail sale to the final consumer, excise taxes are often applied at an earlier stage in the supply chain, such as during production or importation. The cost of this tax is generally incorporated directly into the product’s price, making it less visible to the consumer than sales tax.

These taxes differ from income taxes, which are direct levies on earnings, by targeting particular goods or activities rather than overall income or purchases. Excise taxes are commonly imposed on a narrow range of goods or services, rather than broadly across most transactions. They can be calculated per unit, such as per gallon or per pack, or as a percentage of the value, known as an ad valorem tax.

Examples of Excise Goods

Several categories of goods are subject to excise taxes across the United States. Tobacco products, including cigarettes, cigars, and smokeless tobacco, are taxed at both federal and state levels. For instance, the federal excise tax on a standard pack of 20 cigarettes is approximately $1.01, with additional state taxes varying.

Alcoholic beverages, such as beer, wine, and distilled spirits, also incur excise taxes. Federal taxes on distilled spirits are around $13.50 per proof gallon, while beer is taxed per barrel and wine per gallon, with rates varying based on alcohol content.

Motor fuels, like gasoline and diesel, are another example, with federal excise taxes set at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. Other items that may be subject to excise taxes include airline tickets, heavy trucks, tires, and sometimes certain luxury goods or services like indoor tanning.

Reasons for Excise Taxation

Governments levy excise taxes for various policy objectives, primarily focusing on the characteristics of the goods themselves or the societal impacts of their consumption. One significant reason is to discourage the consumption of certain goods deemed harmful to public health or society, often referred to as “sin taxes.” This applies to products like tobacco and alcohol, where the tax aims to offset associated social costs, such as healthcare expenses.

Another common rationale is to generate revenue for specific purposes, often related to the taxed product or service. For example, taxes on motor fuels frequently fund transportation infrastructure projects, including highway and airport improvements. This mechanism ensures that users of particular public goods contribute directly to their maintenance and development.

Excise taxes can also be applied to goods that have negative environmental impacts, serving as a regulatory tool to promote environmental conservation. While not always explicitly stated, the goal is to internalize external costs associated with production or consumption, such as pollution.

How Excise Taxes are Collected

Excise taxes are typically collected from manufacturers, importers, or the first seller in the supply chain, rather than directly from the final consumer. Businesses that produce or import excisable goods are generally responsible for calculating and remitting these taxes to the relevant tax authorities, such as the Internal Revenue Service (IRS). For instance, many federal excise taxes are reported quarterly using Form 720, the Quarterly Federal Excise Tax Return.

Although the tax is paid by businesses, its cost is almost always passed on to consumers through higher retail prices of the goods. This means consumers indirectly bear the tax burden, even though it is not usually itemized separately on their sales receipts like a sales tax. In certain cases, such as airline tickets, a third party, like the airline, might collect the tax from the purchaser and then remit it to the IRS.