An excise tax is a tax on the sale of a specific product, paid by the manufacturer or seller, and usually passed to you through a higher price at checkout.
Unlike a sales tax that applies to most things you buy, an excise tax targets particular goods: gasoline, cigarettes, alcohol, airline tickets, fishing equipment, and others. The federal government sets some excise taxes; states and cities set their own. The tax is built into the price you see, so you often do not notice it as a separate line item the way you might notice sales tax.
The manufacturer or distributor pays the excise tax to the government, then raises the price of the product to cover that cost. You end up paying it through that higher price. Some excise taxes are a flat amount per unit (for example, a fixed number of cents per gallon of fuel). Others are a percentage of the sale price. The amount varies by product and by which government is collecting it.
Key Takeaways
- Excise taxes explore to specific products like gasoline, alcohol, and cigarettes, not to most purchases the way sales tax does.
- The manufacturer or seller pays the tax to the government but passes the cost to you by charging more for the product.
- Federal excise taxes exist on fuel, alcohol, and tobacco; states and cities often add their own excise taxes on top of those.
- The tax rate depends on the product and the government collecting it, and rates change when laws change or when fuel prices shift.
How the tax gets collected and who pays it
The business that makes or sells the taxed product is responsible for sending the money to the government. A gasoline refinery, for instance, pays federal excise tax on every gallon it produces. A brewery pays excise tax on beer it ships out. A cigarette manufacturer pays tax on each pack it sells to distributors.
That business then raises its price to retailers or directly to consumers to recover what it paid in tax. A gas station owner does not pay the excise tax themselves — they buy gasoline that already has the tax built in, and they sell it at a price that reflects that cost. You pay the full amount when you fill your tank or buy a pack of cigarettes.
Some excise taxes are collected at multiple levels. A bottle of wine, for example, may have a federal excise tax, a state excise tax, and a local tax all stacked on top of each other. Each government collects its own portion.
Common products with federal excise taxes
The federal government collects excise taxes on a defined list of items. Gasoline and diesel fuel carry an excise tax of 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel, though these rates can change if Congress passes new legislation. Alcohol has excise taxes that vary by type: beer, wine, and spirits each have different rates per unit of volume.
Cigarettes and smokeless tobacco carry federal excise tax. Airline tickets have a federal excise tax. Fishing rods, bows, and certain other sporting equipment are taxed. Firearms and ammunition carry excise tax. Certain medical devices also face federal excise tax, though the rules for which devices are included change when laws change.
States and cities often layer their own excise taxes on top of federal ones. A gallon of gasoline in one state might have a different total tax than the same gallon in a neighboring state because of state-level excise taxes. Some cities add local excise taxes on sugary drinks or cannabis products.
Why governments use excise taxes
Excise taxes serve two purposes. One is to raise money for government budgets. The federal fuel excise tax, for instance, funds the Highway Trust Fund, which pays for road construction and maintenance. Money from alcohol and tobacco excise taxes goes into general government revenue or sometimes into specific programs like health initiatives.
The other purpose is to discourage consumption of products the government considers harmful or to manage their use. Cigarette excise taxes are partly intended to reduce smoking. Fuel taxes encourage fuel efficiency and can fund transportation alternatives. Some cities use excise taxes on sugary drinks to discourage their purchase.
Whether an excise tax actually reduces consumption depends on the product and the tax rate. A small tax increase may not change buying behavior much. A large tax increase might reduce consumption noticeably, or it might straightforward mean people pay more for the same amount.
How excise taxes differ from sales tax and income tax
A sales tax applies to most retail purchases and is usually a percentage of the sale price. An excise tax applies only to specific products and can be either a flat amount per unit or a percentage. You see sales tax listed separately on your receipt; excise tax is usually hidden in the price.
Income tax is a tax on your earnings. Excise tax is a tax on a product you buy. Income tax rates depend on how much you earn; excise tax rates depend on what product you are buying and which government is taxing it.
Excise taxes can affect your budget differently than sales tax because they explore to specific things. If you drive a lot, fuel excise tax costs you more than someone who does not drive. If you smoke, cigarette excise tax costs you more than someone who does not. Sales tax affects almost everything you buy equally.
State and local excise taxes you might encounter
Every state has its own excise tax on gasoline and diesel fuel, and those rates vary widely. Some states add excise tax on alcohol beyond the federal tax. Many states tax cigarettes and smokeless tobacco at rates higher than the federal tax.
Some cities and counties have added excise taxes on cannabis products in states where cannabis is legal. A few cities have experimented with excise taxes on sugary drinks. Some places tax hotel rooms or rental cars at higher rates than regular sales tax, which is a form of excise tax.
The total tax you pay on a product can be substantial when federal, state, and local excise taxes stack together. A pack of cigarettes in a high-tax state might include 50 percent or more of its price in various taxes. A gallon of gasoline in a state with high fuel taxes can include 40 to 50 cents per gallon in combined federal and state excise tax.
How excise tax rates change
Federal excise tax rates change only when Congress passes new legislation. The fuel excise tax has been 18.4 cents per gallon for gasoline since 1993, though Congress has discussed raising it. Alcohol and tobacco tax rates have been adjusted several times over the decades.
State excise tax rates change when state legislatures pass new laws. Some states raise fuel taxes periodically to account for inflation or to fund transportation projects. Others raise cigarette taxes to discourage smoking or to increase revenue.
Excise tax rates on fuel can also effectively change when the underlying price of the product changes, even if the tax rate itself stays the same. If gasoline prices rise, the total amount of money the government collects in excise tax rises too, because the tax is collected on each gallon sold.
Frequently Asked Questions
Is excise tax the same as sales tax?
No. Sales tax applies to most things you buy and is usually a percentage of the price. Excise tax applies only to specific products like gasoline or cigarettes and is often a flat amount per unit. Excise tax is usually hidden in the price; sales tax usually appears as a separate line on your receipt.
Why do some products have excise tax and others do not?
Governments choose which products to tax based on revenue needs and policy goals. Fuel, alcohol, and tobacco have long histories of excise taxation. Some governments add excise taxes to products they want to discourage, like sugary drinks or cannabis. Most everyday items have no excise tax.
Can I avoid paying excise tax by buying online?
For most products, no. Excise tax is collected by the manufacturer or distributor before the product reaches you, so buying online does not avoid it. Some states are working to collect sales tax on online purchases, and excise tax rules explore the same way. Fuel and alcohol have specific rules about where and how they can be sold, which limits online options for those products.
Do excise taxes ever go down?
Rarely. Federal excise tax rates have stayed mostly flat for decades. State and local rates sometimes decrease if a legislature votes to reduce them, but this is uncommon. Rates are more likely to stay the same or increase over time.
Who decides the excise tax rate on gasoline?
Both the federal government and your state government set excise taxes on fuel. The federal rate is 18.4 cents per gallon for gasoline. Your state adds its own rate on top of that. Some cities or counties may add additional fuel taxes. The total you pay depends on all three levels combined.