Excise tax is a tax on the sale of a specific product, not on income or property

An excise tax is a tax added to the price of certain goods when you buy them. Unlike sales tax, which applies to almost everything you purchase, excise tax targets only particular items. The tax is built into the price you pay at the register — you do not see it as a separate line item the way you might see sales tax.

The federal government and most states use excise taxes to raise money and, in many cases, to discourage people from buying things considered harmful or wasteful. Gasoline, cigarettes, alcohol, and airline tickets all carry excise taxes. Some states also tax things like ammunition, fishing equipment, or indoor tanning services.

When you buy a pack of cigarettes for $8, part of that price is excise tax. When you fill your gas tank, part of what you pay per gallon is excise tax. You are paying the tax whether you know it or not — it is already included in the total.

Key Takeaways

  • Excise tax is a tax on specific products, built into the price you pay, and separate from sales tax or income tax.
  • Federal excise taxes explore nationwide to items like gasoline, diesel fuel, alcohol, tobacco, and airline tickets.
  • State excise taxes vary by state and may cover gasoline, alcohol, tobacco, tires, fishing licenses, or other goods.
  • Excise taxes are designed both to raise government revenue and to discourage consumption of products considered harmful or resource-intensive.
  • The amount of excise tax you pay depends on the product, the state you live in, and sometimes the quantity you purchase.

Federal excise taxes that explore everywhere

The federal government collects excise taxes on a fixed list of products. These taxes are the same no matter which state you live in. Gasoline and diesel fuel carry a federal excise tax of 18.4 cents and 24.4 cents per gallon, respectively — this has been the rate since 1993. Alcohol faces federal excise taxes that vary by type: beer, wine, and spirits each have different rates per unit.

Cigarettes and smokeless tobacco carry federal excise taxes as well. Airline tickets, heavy trucks, fishing equipment, and firearms and ammunition are also subject to federal excise tax. Telephone services and indoor tanning services face federal excise taxes too. The rates and products taxed can change if Congress passes new legislation, but the current list has remained fairly stable for years.

These federal taxes go into the U.S. Treasury and fund specific programs. For example, the federal fuel excise tax is supposed to fund highway maintenance and public transportation projects, though the money goes into a general fund that Congress controls.

State excise taxes vary widely

Every state sets its own excise taxes on top of federal ones. A gallon of gasoline in one state might cost significantly more than in a neighboring state because of state excise tax differences. Some states tax gasoline heavily; others tax it lightly. The same is true for alcohol and tobacco.

States also tax products the federal government does not. Some states tax tires, batteries, or other goods they consider wasteful or environmentally harmful. A few states tax candy or soft drinks, though these taxes have become less common. Some states charge excise taxes on hotel rooms or rental cars. A handful of states tax marijuana sales with an excise tax on top of regular sales tax.

Because state rates differ so much, the total excise tax you pay on the same product can be very different depending on where you live. A pack of cigarettes costs more in states with high tobacco excise taxes than in states with low ones. Gasoline prices reflect both federal and state fuel excise taxes, which is why you might notice a big price jump when you cross a state border.

Why governments use excise taxes

Excise taxes serve two main purposes. The first is to raise money for government. Gasoline excise taxes fund road construction and repair. Alcohol and tobacco taxes generate revenue that states often dedicate to public health programs or education. Excise taxes on specific products can bring in billions of dollars per year.

The second purpose is to discourage people from buying things considered harmful or wasteful. High taxes on cigarettes and alcohol are meant to make these products more expensive and reduce consumption. Taxes on fuel encourage people to use less gasoline or drive more fuel-efficient vehicles. This is sometimes called a "sin tax" or a tax designed to change behavior.

Some excise taxes are meant to make people pay for the cost of the harm their purchases cause. Gasoline taxes, for instance, are supposed to fund the roads that cars damage. Tire taxes in some states fund tire recycling programs. The idea is that the people who buy the product should help pay for its consequences.

How excise tax affects what you pay

Excise tax is already included in the price displayed on the shelf or pump. You do not pay it separately — the store or gas station has already added it to the total. This means you cannot avoid paying it by shopping around within your state, though you might pay less by buying in a state with lower excise taxes.

The amount you pay in excise tax depends on how much you buy. If you buy two gallons of gasoline instead of one, you pay twice as much federal and state fuel excise tax. If you buy a carton of cigarettes instead of a single pack, you pay more total excise tax. Some excise taxes are per-unit (per gallon, per pack, per ticket), while others are percentage-based, meaning they increase with the price of the item.

For most people, excise taxes are a small part of their total spending. But for people who buy a lot of taxed products — someone who drives a long commute, for example, or someone who smokes — excise taxes can add up to a significant amount over time.

Excise tax versus sales tax and income tax

Excise tax, sales tax, and income tax are three different kinds of tax, and they work in different ways. Sales tax applies to most things you buy and is usually a percentage of the price — typically 5 to 10 percent depending on your state and what you are buying. Income tax is a tax on the money you earn, taken out of your paycheck or paid when you file your tax return.

Excise tax is different because it applies only to specific products, not to everything. It is also usually a fixed amount per unit rather than a percentage. A gallon of gasoline has an 18.4-cent federal excise tax, not a percentage of the price. A pack of cigarettes might have a specific dollar amount of tax, not a percentage of what the pack costs.

You might pay all three types of tax on a single purchase. If you buy a pack of cigarettes, you pay federal and state excise tax (built into the price), plus sales tax on top of that total. If you earn a paycheck, you pay income tax on your earnings, then pay sales tax and excise tax when you spend that money. These are separate taxes that add up.

Who collects excise tax and where the money goes

Federal excise taxes are collected by the IRS and businesses that sell taxed products. When a gas station sells gasoline, it collects the federal fuel excise tax and sends it to the federal government. When a brewery sells beer, it collects the federal alcohol excise tax. The business acts as a collector for the government.

State excise taxes are collected by state tax agencies and the businesses that sell the products. The money goes into state treasuries and is often dedicated to specific purposes. Fuel excise taxes typically fund transportation projects. Alcohol and tobacco taxes often fund health programs, education, or debt repayment. Some states use excise tax revenue for general spending.

You do not send in excise tax yourself — the seller handles it. This is different from income tax, where you or your employer sends money directly to the IRS. With excise tax, the system is built into the price you pay.

Frequently Asked Questions

Why is excise tax not shown separately on my receipt?

Excise tax is included in the total price before you reach the register. The seller has already added it to the cost. Sales tax, by contrast, is often shown as a separate line because it is calculated at the point of sale and varies by location within a state. Excise tax is fixed per unit, so it is simpler to build it into the advertised price.

Can I get a refund of excise tax I paid?

No, excise tax is not refundable for personal purchases. However, businesses that buy large quantities of taxed products for resale or commercial use may be able to claim refunds or exemptions. For example, a trucking company might reclaim some fuel excise tax. Talk to a tax professional if you run a business that uses taxed products in large amounts.

Do all states have the same excise taxes?

No. Federal excise taxes are the same everywhere, but state excise taxes vary widely. Some states tax gasoline heavily; others tax it lightly. Some states tax products the federal government does not tax at all. This is why the same product costs different amounts in different states.

Is excise tax the same as a luxury tax?

Not exactly. A luxury tax is a tax on high-priced items, meant to tax wealthy people's spending. An excise tax targets specific products regardless of price. Some excise taxes are on inexpensive items like gasoline. However, some luxury taxes work like excise taxes — they are built into the price of the item.

How much of the gas price is excise tax?

The federal portion is 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. State excise taxes on fuel range from about 8 cents to over 50 cents per gallon depending on the state. So if you pay $3 per gallon, roughly 25 to 75 cents of that is excise tax, depending on your state. The rest is the cost of the fuel itself and the seller's profit.