Excise tax is a tax on the sale of a specific product, not a general sales tax on everything you buy
An excise tax is a tax added to the price of certain goods or services. Unlike a sales tax that applies to most things you purchase, excise tax targets particular items: gasoline, cigarettes, alcohol, airline tickets, fishing equipment, or indoor tanning services. The tax is built into the price you pay at the register, so you often do not see it as a separate line item.
The federal government collects excise taxes, and many states and cities add their own on top. A gallon of gasoline, for example, carries a federal excise tax of 18.4 cents per gallon, plus state and local taxes that vary by location. A pack of cigarettes includes federal excise tax of $1.01 per pack, plus state taxes ranging from a few cents to several dollars depending on where you live.
Excise taxes serve two purposes: they raise money for government, and they discourage consumption of products the government considers harmful or wants to limit. The tax on gasoline funds highway maintenance. The tax on cigarettes and alcohol is partly intended to reduce smoking and drinking.
Key Takeaways
- Excise tax applies to specific products like fuel, tobacco, and alcohol, not to general purchases like groceries or clothing.
- The tax is included in the price you pay, so you may not see it listed separately on your receipt.
- Both the federal government and individual states impose excise taxes, and the total amount varies by location and product.
- Excise taxes fund specific government programs — gasoline tax funds roads, for example — and are sometimes used to discourage consumption of certain products.
How excise tax differs from sales tax
A sales tax applies to nearly everything you buy — groceries, clothes, furniture, electronics. An excise tax applies only to specific items the government has decided to tax. In most states, you pay sales tax on a shirt but not on milk. You pay excise tax on a gallon of gasoline but not on a quart of motor oil.
Sales tax rates are the same across all products in a given location. Excise tax rates vary by product and often by location. The federal excise tax on beer is different from the federal excise tax on wine, which is different from the tax on spirits. A state may add its own excise tax on beer but not on wine.
Excise taxes are often hidden in the final price. When you buy a gallon of gas for $3.50, the 18.4 cents of federal excise tax is already included. Sales tax, by contrast, is usually shown as a separate line on your receipt so you see exactly how much you are paying.
Common products that carry federal excise tax
The federal government taxes a long list of specific items. Gasoline and diesel fuel carry the 18.4-cent-per-gallon federal excise tax. Cigarettes are taxed at $1.01 per pack of 20. Beer, wine, and spirits each have different tax rates per unit. Airline tickets carry a 7.5 percent excise tax. Fishing rods, bows, and certain ammunition are taxed. Indoor tanning services are taxed at 10 percent.
Vaccines, insulin, and certain medical devices also carry federal excise taxes, though some of these rates have changed in recent years. Heavy trucks and trailers are taxed based on weight. Recreational equipment like snowmobiles and boats may be taxed depending on the item and its use.
The list changes over time as Congress passes new laws. In 2022, for example, Congress added a new excise tax on certain high-cost health insurance plans. In 2023, a new excise tax on insulin took effect, capping the out-of-pocket cost for Medicare beneficiaries at $35 per month.
Why governments use excise tax
Excise taxes raise revenue for specific purposes. The federal tax on gasoline goes into the Highway Trust Fund, which pays for road construction and maintenance. The tax on air travel helps fund the Federal Aviation Administration. Taxes on alcohol and tobacco historically funded public health programs, though the money now goes into general government budgets in many cases.
Excise taxes also discourage consumption of products considered harmful or wasteful. A higher tax on cigarettes makes smoking more expensive and can reduce the number of people who smoke, particularly young people with limited budgets. A tax on carbon-intensive fuels is intended to encourage people to use less fuel or switch to cleaner alternatives.
Some excise taxes are designed to make sure the people who use a service pay for it. Hunters and fishermen pay excise taxes on equipment and ammunition, and that money funds wildlife conservation and habitat management. People who use airports pay excise tax on tickets, which helps maintain airport infrastructure.
State and local excise taxes on top of federal tax
Most states add their own excise taxes to products already taxed federally. Gasoline is a clear example: you pay the federal 18.4 cents per gallon, plus a state tax that ranges from about 6 cents per gallon in Alaska to over 67 cents per gallon in California. Some cities add a local gas tax on top of the state tax.
Cigarette taxes vary dramatically by state. The federal tax is $1.01 per pack, but New York State adds $4.35 per pack, while Missouri adds only 17 cents. A pack of cigarettes that costs $5 in one state might cost $12 in another, largely because of state excise tax differences.
Alcohol taxes also vary. Some states tax beer, wine, and spirits at different rates. Some cities add local excise taxes on alcohol sales. A few states have no state income tax but rely heavily on excise taxes on fuel and alcohol to fund government.
How excise tax appears on your bill
At a gas station, the price per gallon shown on the pump includes all federal, state, and local excise taxes. You do not see a breakdown of how much is tax and how much is the base price of the fuel. The station owner pays the excise tax to the government and passes the cost to you through the pump price.
At a liquor store, the shelf price of a bottle of beer or wine includes federal and state excise taxes. Again, these are not usually shown separately. The retailer collects the tax and sends it to the government.
For airline tickets, the excise tax may appear as a line item on your receipt, labeled as a federal tax. For other products like fishing rods or indoor tanning, the tax is typically built into the price without a separate line.
Who actually pays the excise tax
The person who buys the product pays the excise tax, even though they may not see it as a separate charge. When you buy a gallon of gasoline, you pay the excise tax as part of the pump price. When you buy a pack of cigarettes, the tax is included in what you hand to the cashier.
Businesses that sell excise-taxed products are responsible for collecting the tax from customers and sending it to the government. A gas station collects the fuel excise tax from every customer and remits it to the state and federal governments. A brewery collects the beer excise tax when it sells to distributors, who collect it again when they sell to retailers, who collect it when they sell to customers — but only one layer of tax applies to the final sale.
In some cases, businesses can claim a refund or exemption. A farmer who buys diesel fuel for farm equipment may be able to claim a refund of the federal excise tax. A manufacturer who uses a taxed material as an ingredient in a product may be able to claim an exemption. These exemptions are specific and require documentation.
Frequently Asked Questions
Is excise tax the same as sales tax?
No. Sales tax applies to most purchases and is usually shown separately on your receipt. Excise tax applies only to specific products like gasoline or cigarettes and is typically built into the price you see. Sales tax rates are the same for all items in a location; excise tax rates vary by product.
Why is excise tax on some products but not others?
The government taxes products it wants to fund specifically (like gasoline for roads) or discourage consumption of (like cigarettes). Products like groceries and clothing are not taxed with excise tax because they are considered necessities or because the government does not have a specific policy goal around them.
Can I get a refund of excise tax I paid?
Consumers generally cannot claim a refund of excise tax on products they buy for personal use. Businesses may be able to claim refunds or exemptions in specific situations — for example, a farmer buying fuel for farm equipment or a manufacturer using a taxed material in production. You would need to contact the relevant tax authority to learn whether your situation qualifies.
Does every state have the same excise tax rates?
No. While the federal government sets a baseline excise tax on products like gasoline and cigarettes, each state can add its own tax on top. State excise tax rates vary widely. For example, gasoline excise tax ranges from about 6 cents per gallon in Alaska to over 67 cents in California.
What happens to the money from excise taxes?
The money goes to government budgets. Federal excise tax on gasoline funds the Highway Trust Fund for road maintenance. Excise taxes on other products may fund specific programs or go into general government revenue. State and local excise taxes typically fund state and local budgets.