Most people pay many different types of taxes, and they most often notice the income tax, sales tax, and property tax they have to pay. Yet there are other taxes that Americans pay all the time without even realizing it.
Excise tax is a broad category of taxes that federal and state (or even local) governments impose on certain items, such as gasoline, cigarettes, and alcoholic beverages. Because excise tax is paid by the retailer or producer and not by the consumer, it's easy for those who buy these products never to realize that there's a tax related to their purchase, let alone how to calculate how much the excise tax is. Below, we'll look more deeply into excise taxes.
How much are excise taxes?
Excise taxes vary by location. Federal law requires that federal excise taxes be charged uniformly across the nation, but states have also created their own excise taxes that can make the total tax burden vary greatly from place to place.
Consider the three major types of excise taxes -- tobacco, gasoline, and alcohol -- to see some good examples of how this works in practice.
The federal government imposes an excise tax of $1.01 per pack on cigarettes, which produced more than $13 billion in revenue in 2014, according to figures from tobacco giant Altria Group. However, states also impose excise taxes, and they vary from just $0.17 per pack in Missouri to as much as $4.35 per pack in New York, according to figures gathered by the Tax Foundation. For cigarettes, the median state excise tax rate is $1.53 per pack, which is more than half again the federal excise tax rate.
For gasoline, the federal excise tax rate is $0.184 per gallon. Again, however, state excise add-ons come in a wide range. Data from the American Petroleum Institute found that state gasoline taxes range from $0.1225 per gallon in Alaska to $0.5040 per gallon in Pennsylvania. Some of these taxes aren't technically excise taxes, but they're effectively the same in that they target specific products. Total highway excise taxes raised $35.5 billion at the federal level, making up a huge portion of the money funding the Highway Trust Fund.
Finally, alcohol has different excise taxes depending on type. The regular rate for beer is $18 per 31-gallon barrel. Wine excise taxes vary by alcohol content, ranging from $1.07 to $3.40 per gallon. Hard cider carries a $0.226-per-gallon excise tax. Distilled spirits have an excise tax rate of $13.50 per proof gallon, which works out to $2.14 for a 750-milliliter bottle of 80-proof alcohol. States impose a wide range of alcohol taxes, with spirits taxes ranging from $1.50 per proof gallon in Maryland to $14.27 in the state of Washington.
How are excise taxes enforced?
Enforcement and collection of excise taxes varies depending on the government imposing the tax. At the federal level, the Bureau of Alcohol, Tobacco, Firearms, and Explosives is responsible for investigating and preventing offenses related to unlawful manufacturing and trafficking of alcohol and tobacco. The IRS is responsible for handling excise tax returns and collecting the roughly $70 billion in total excise tax revenue owed to the federal government annually.
At the state level, various enforcement agencies and tax collection entities often work together to enforce the excise tax. In many states, sales of alcohol are allowed only within state-operated stores, and that practice greatly facilitates the collection of any excise tax revenue. Private retailers often pay excise taxes the same way they remit sales taxes to state and local governments.
Are excise taxes good or bad?
Excise taxes are often controversial. In the cases of tobacco and alcohol, some see excise taxes as a way to discourage use of those products, while others note that the burden of paying those taxes falls disproportionately on lower-income consumers. For gasoline, the fact that the federal excise tax is a flat rate, rather than a percentage of the current gas price, has led to criticism from those who believe the tax hasn't kept up with the true maintenance costs imposed on governments by users of highways.
Excise taxes don't get talked about very much, but they do play a vital role in the overall revenue streams that federal and state governments receive. By being more aware of excise taxes, you'll put yourself in a better position to avoid them where possible, and to minimize them when necessary.