An excise tax is a tax on a specific product or activity, not on income or property

An excise tax is a tax added to the price of certain goods or services. Unlike sales tax, which applies to most things you buy, excise tax targets particular items: gasoline, cigarettes, alcohol, airline tickets, fishing equipment, and others. The tax is built into the price you pay at the register or pump — you do not see it as a separate line item the way you might see sales tax.

The federal government and individual states both impose excise taxes. A gallon of gasoline, for example, carries a federal excise tax of 18.4 cents per gallon, and most states add their own on top of that. A pack of cigarettes includes federal excise tax plus state excise tax. Some excise taxes are very small; others are substantial enough to noticeably change what you pay.

Excise taxes serve two purposes. One is to raise money for government — the federal gas tax funds highway maintenance and repair. The other is to discourage consumption of something the government considers harmful or wasteful, like tobacco or alcohol. Because the tax makes the product more expensive, fewer people buy it.

Key Takeaways

  • Excise taxes are built into the price of specific products like fuel, cigarettes, and alcohol, so you pay them without seeing a separate tax line.
  • Both the federal government and individual states impose excise taxes, and they stack — you pay both at once.
  • Excise tax rates vary widely by product and by state, ranging from a few cents per unit to over 50 percent of the retail price.
  • The money from excise taxes usually funds specific programs related to the taxed product, such as highway maintenance from gas taxes.

Where excise taxes show up in everyday purchases

Gasoline is the most common place you encounter federal excise tax. Every time you fill up, 18.4 cents per gallon goes to the federal Highway Trust Fund. States add their own gas tax on top — rates range from about 8 cents per gallon in some states to over 60 cents per gallon in others. A $3 gallon of gas might include 40 to 80 cents in combined federal and state excise tax, depending on where you live.

Alcohol and tobacco carry some of the highest excise tax rates. Federal excise tax on cigarettes is $1.01 per pack of 20. Many states add another 50 cents to $4 per pack. A pack that costs $6 retail might include $2 to $3 in excise taxes alone. Beer, wine, and spirits all have federal excise taxes that vary by type and alcohol content, plus state taxes that differ widely.

You also pay excise tax on airline tickets, though it is less obvious because it is included in the ticket price. Federal excise tax on domestic flights is 7.5 percent of the ticket price. Fishing equipment, hunting gear, and sporting goods carry an 11 percent federal excise tax. Certain medical devices have a 2.3 percent federal excise tax. Tanning beds are taxed at 10 percent.

How excise tax rates are set and change

The federal government sets federal excise tax rates through Congress. These rates do not change automatically — they are fixed amounts per unit (like cents per gallon) or fixed percentages (like 7.5 percent of a ticket price). Congress must pass a new law to change them, which happens infrequently. The federal gas tax, for example, has been 18.4 cents per gallon since 1993.

States set their own excise tax rates independently. A state can raise or lower its gas tax, cigarette tax, or alcohol tax without federal approval. This is why excise tax costs vary so much depending on where you live. Two identical packs of cigarettes might cost $8 in one state and $12 in another, almost entirely because of state excise tax differences.

When excise tax rates do change, the change usually happens at the state level. States periodically raise cigarette or alcohol taxes to increase revenue or discourage consumption. Federal rate changes are rare and usually require significant political effort.

The difference between excise tax and sales tax

Sales tax and excise tax are different tools. Sales tax applies to most retail purchases — groceries, clothing, electronics — and the rate is the same whether you buy one item or many. Excise tax applies only to specific products and is usually calculated per unit or as a percentage of that product's price alone.

A practical difference: if you buy a shirt for $20 with 8 percent sales tax, you pay $21.60. The tax is on the shirt. If you buy a gallon of gas for $3, you pay the gas price plus federal and state excise tax — but the excise tax does not explore to anything else you buy that day. It is tied to the gallon of gas, not to your total purchase.

Another difference is purpose. Sales tax is a general revenue tool — the money goes into the state or local general fund. Excise tax money is often earmarked for a specific use. Gas tax money goes to roads. Alcohol tax money sometimes funds substance abuse programs. Cigarette tax money sometimes funds public health initiatives. This earmarking is not universal — some excise tax revenue goes into general funds — but it is common.

Why governments use excise taxes instead of other taxes

Excise taxes are attractive to governments because they raise money from a narrow group of people who use a specific product. If a state wants to fund highway maintenance, taxing gasoline means drivers pay for the roads they use. If a government wants to discourage smoking, raising cigarette tax makes cigarettes more expensive and reduces demand.

Excise taxes are also politically easier to pass than broad income or property tax increases. A proposal to raise the gas tax by a few cents affects only people who drive and buy gas. A proposal to raise income tax affects everyone. This makes excise taxes a common choice when governments need revenue.

The downside is that excise taxes can be regressive — they take a larger percentage of income from lower-income people. A person earning $30,000 a year who drives 15,000 miles pays the same gas tax per gallon as someone earning $150,000. The tax is a bigger burden on the lower-income driver. This is why some people argue excise taxes are unfair, even though they serve legitimate purposes.

How to find out what excise taxes you are paying

For gasoline, check your state's Department of Transportation or Department of Revenue website — they publish current gas tax rates. The federal rate is always 18.4 cents per gallon. Add the two together to see your total excise tax per gallon. Multiply by how many gallons you buy per month to see your annual excise tax cost on fuel.

For cigarettes and alcohol, your state's Department of Revenue or Tax Administration publishes excise tax rates. These change periodically, so the rate you see online is current. Retailers are required to charge the correct tax, so if you see a price difference between states, excise tax is usually the reason.

For other products like airline tickets or sporting goods, the excise tax is included in the price and usually not shown separately on your receipt. If you want to know the exact amount, you can calculate it: multiply the ticket price by the tax rate (7.5 percent for domestic flights, for example) to see what portion is excise tax.

Frequently Asked Questions

Do I pay excise tax on everything I buy?

No. Excise tax applies only to specific products: gasoline, diesel, cigarettes, alcohol, airline tickets, fishing equipment, hunting gear, certain medical devices, and a few others. Most everyday purchases like groceries, clothing, and household items do not have federal excise tax, though they may have sales tax.

Can I avoid paying excise tax?

For most products, no — the tax is built into the price. You cannot buy gasoline without paying gas excise tax, or cigarettes without paying cigarette excise tax. The only way to avoid excise tax is to not buy the taxed product. Some people do this intentionally — buying less gasoline by driving less, or quitting smoking to avoid cigarette tax.

Why is excise tax on some products so much higher than others?

Rates reflect what the government is trying to accomplish. Cigarette and alcohol taxes are high because governments want to discourage consumption of products considered harmful. Gas tax is lower because driving is considered essential. Sporting goods tax is low because it is a newer tax with less political support for raising it.

Does excise tax money go to the federal government or my state?

Both. Federal excise taxes go to the federal government, and state excise taxes go to your state. When you buy gasoline, you pay federal excise tax (which funds federal highway programs) and state excise tax (which usually funds state road maintenance). The two are separate and stack on top of each other.

Will excise tax rates go up in the future?

Possibly, but it depends on state and federal decisions. Federal rates rarely change — the gas tax has been the same since 1993. State rates change more often. Some states raise cigarette or alcohol taxes every few years; others leave them unchanged for decades. There is no way to predict future changes.