Excise tax in the United States is an indirect tax on listed items. Excise taxes can be and
are made by federal, state and local governments and are not uniform throughout the United
States. Excise taxes are collected by the producer or retailer and not paid directly
by the consumer, and as such often remain "hidden" in the price of a product or service,
rather than being listed separately. This is thought to explain their appeal to many
politicians.
Constitutional law The U.S. Constitution, ratified in 1789, gave
the federal government authority to tax, stating that Congress has the power to
"... lay and collect taxes, duties, imposts and excises, pay the debts and provide for
the common defense and general welfare of the United States."
Tariffs between states are prohibited by the U.S. Constitution and all domestically made
products can be imported or shipped to another state tax free. In the U.S. constitutional
law sense, an excise tax is usually an event tax. A recent exception to this "state of
being" principle is the "minimum essential coverage" tax under Internal Revenue Code
section 5000A as enacted by the Patient Protection and Affordable Care Act, whereby an indirect
tax is imposed on the condition of not having health insurance coverage.
Federal excise taxes are also required by the U.S. Constitution to be uniform throughout
the United States: "...all duties, imposts and excises shall
be uniform throughout the United States." Historical background
Federal excise taxes have a storied background in the United States. Responding to an urgent
need for revenue following the American Revolutionary War, after the U.S. Constitution was ratified
by the ninth state in 1788 the newly elected First United States Congress passed, and President
George Washington, signed the Tariff Act of July 4, 1789, which authorized the collection
of tariff duties on imported goods. Tariffs and excise taxes were authorized by the United
States Constitution and recommended by the first U.S. Secretary of the Treasury, Alexander
Hamilton, in 1789 to tax foreign imports. Hamilton thought it was important to start
the U.S. federal government out on a sound financial basis with good credit and a regular,
easily collected source of income. Customs duties on imported goods, as set by tariff
rates, were the source of about 80-95% of all federal revenue up to 1860. Having just
fought a war over taxation the U.S. Congress wanted a reliable source of income that was
relatively unobtrusive, brought in enough money to pay off the debt and pay for the
relatively low cost federal government and be relatively easy to collect. Tariffs met
all these criteria. In addition to tariffs, low excise taxes were
imposed to provide the federal government with some additional money to pay part of
its operating expenses and to help redeem at full value U.S. federal debts and the debts
the states had accumulated during the American Revolutionary War.
The first federal budget was about $4.6 million and the population in the 1790 U.S. Census
was about four million, so that the average federal tax was about $1/person per year.
Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be
paid with about four days work. Paying even this was usually optional, as taxed imports
listed on the tariff lists could usually be avoided by buying domestic products if desired.
Congress set low excise taxes on only a few goods, such as whiskey, rum, tobacco, snuff
and refined sugar. These low excise taxes accounted for only a small percentage of the
federal income. Tariffs were initially by far the largest source of federal income.
The excise tax on whiskey was so despised by western farmers who had no easy way to
transport their bulky grain harvests to market without converting them into alcohol that
it led to the Whiskey Rebellion, which had to be quelled by Washington calling up the
militia and suppressing the rebellious farmers, all of whom were later pardoned. In the days
before steamboats, canals, railroads, etc. bulky cargo could not economically be shipped
far. The whiskey excise tax collected so little and was so despised that it was abolished
by President Thomas Jefferson in 1802. In the Napoleonic Wars and the War of 1812
the imports and tariff taxes in the United States plummeted and Congress in 1812 brought
back the excise tax on whiskey to partially compensate for the loss of customs/tariff
revenue. Within a few years customs duties brought in enough federal income to abolish
again nearly all federal taxes except tariffs. When the United States public debt was finally
paid off in 1834, President Andrew Jackson abolished the excise taxes and reduced the
customs duties in half. Excise taxes stayed essentially zero until
the American Civil War brought a need for much more federal revenue. Excise taxes were
reintroduced on a wider range of items and income taxes were introduced.
By about 1916 the loans taken out during the Civil War were all paid off and the excise
taxes were again set very low. On January 16, 1919 the 18th Amendment was passed and
alcohol production, sale and transport were essentially prohibited. Taxing alcohol products
would have produced almost no income, given that alcohol sales and production had gone
underground. All federal excise taxes remained essentially zero for the next ten years.
During the Great Depression President Franklin D. Roosevelt and Congress started reintroducing
excise taxes to increase federal income which had dropped because of the much lower incomes
and the resulting lower income tax collections. On December 5, 1933 the 21st Amendment was
ratified and alcohol production became legal again. The healthy excise tax on now-legal
alcoholic beverages paid about one third of all federal taxes during the Great Depression.
Excise taxes now have become an established part of the general budget as well as the
source of funds for various trusts. The U.S. has expanded the definition of items on the
excise tax lists as trusts for highways, airports, vaccines, black lung, oil spills, etc. have
been set up. These are financed by excise taxes on fuels, tickets, vaccines, coal, oil,
etc. Excise tax types
Excise taxes are usually taxes on events, such as the purchase of a quantity of a particular
item like gasoline, diesel fuel, liquor, wine, cigarettes, airline tickets, tires, trucks,
etc. These taxes are usually included in the price of the item—not listed separately
like sales taxes usually are. To minimize tax accounting complications, the excise tax
is usually imposed on quantities like gallons of fuel, gallons of wine or drinking alcohol,
packets of cigarettes, etc. and are usually paid initially by the manufacturer or retailer.
Excise taxes are often passed on to the consumer who eventually consumes the product. The price
for which the item is eventually sold is not generally considered in calculating the amount
of the excise tax. Income taxes, value added taxes, sales taxes, and transfer taxes are
examples of other excise taxes but are typically not called excise taxes because of the different
ways they are imposed. In the U.S. essentially the only taxes called excise taxes are the
taxes on quantities of enumerated items. Other taxes on certain events may technically be
considered excise taxes but may or may not be collected under the name "excise tax."
An example of a state of being tax is an ad valorem property tax—which is not an excise.
Customs or tariffs are based on the property as a state of being or ad valorem taxes and
are also typically not called excise taxes. Excise taxes are collected by producers and
retailers and paid to the Internal Revenue Service or other state and/or local government
tax collection agency. Historical federal excise tax collections to 1945 are listed
in the Historical Statistics of the United States and more recent federal excise tax
data is listed in the White House historical tables—Table 2.1
For purposes of the U.S. Constitution, an excise tax can be defined as any indirect
tax. An excise means any tax other than: a property tax or ad valorem tax by reason of
its ownership; a tax per head tax or capitation tax by being present.
An excise is imposed on listed specific taxable events or products and is usually not collected
or paid directly by the consumer. Excise taxes are collected by the producer or retailer
and paid to the Internal Revenue Service, state or local tax agency. The consumer ultimately
bears the economic burden of the excise tax, the amount of which is added to the price
of the product when it is sold. Often sales taxes are collected as a percentage of the
cost of the product and its excise tax—a tax on a tax.
Traditionally the federal government has left property taxes and sales taxes to the states
and local governments for their revenue. Tariffs or customs duties on imported goods are essentially
the only property taxes imposed by the U.S. federal government. Tariffs can be set only
by the federal government, not by any state or local jurisdiction. For U.S. constitutional
law purposes, a customs duty or tariff is nominally in a separate category from an excise
tax. Excise taxes can be set by federal, state and local jurisdictions.
Many taxes are simply called an excise tax in the statute imposing that tax even though
they could more accurately be called some other kind of tax. A collection of different
taxes has accumulated over the years under the excise tax classification.
Often trust funds do not collect enough taxes because of assumptions that the politicians
made in setting the excise tax rates and allowable trust fund projects result in underfunding.
Changing consumer purchases have made the original assumptions wrong which may also
result in underfunding. Because many of the funds are allocated to repay bonds and other
long term projects, they often require an infusion of general funds to stay solvent.
Long term adjustments of tax rates or a less extensive list of allowable trust fund projects
to keep the funds solvent require bi-partisan agreements, which are obviously rare.
The excise taxes on alcoholic beverages, tobacco products and firearms are administered under
the Alcohol and Tobacco Tax and Trade Bureau in the United States Department of the Treasury.
The total excise taxes on gasoline, diesel etc. for each state have been calculated.
For excise taxes in each state on fuels, see Fuel taxes in the United States. For excise
taxes in each state on cigarettes, see Cigarette taxes in the United States.
Federal Trust Fund excise tax collections are often remitted to each state by complicated
allocation plans. The Highway Trust fund moneys are split between highways and transit systems.
The Highway Account normally receives about 85% of all highway trust fund taxes, and the
Mass Transit Account receives about 15% of all Highway Trust Fund excise tax collections.
The Highway Trust Fund may well require tax rate adjustments to stay solvent and make
up for the increased car mileage dictated by the EPA or the increased use of untaxed
electric vehicles. As fuel prices increase, there is a slow decrease in gallons of fuel
bought as vehicles are made more efficient and/or travel smaller distances all of which
reduce Highway Trust Fund collections. Federal funding of the Highway Trust Fund is restricted
for use on capital expenditures, such as construction and reconstruction of roads, bridges or tunnels,
or payment of bonds sold to finance the work. The bulk of funding is for specific programs
set up to channel aid to the states for a variety of uses, such as providing capital
funding for the Nation’s most heavily used roads, maintaining interstates, and fixing
bridges. Regular maintenance on non-interstate roads, including pothole patching and snowplowing,
must be funded through other sources. Funding often requires a partial dollar match by the
states. The Mass Transit Account which gets its funding from a fraction of the excise
taxes imposed on fuels, etc. has similar restrictions. Statutory law
The term "excise" also has a statutory law meaning. Generally, in the United States any
statute that imposes a tax specifically denominated as an "excise" is an excise tax law. U.S.
federal statutory excises are imposed under Subtitle D and Subtitle E of the Internal
Revenue Code, 26 U.S.C. § 4001 through 26 U.S.C. § 5891, relating to such things
as luxury passenger automobiles, heavy trucks and trailers, "gas guzzler" vehicles, tires,
petroleum products, coal, vaccines, recreational equipment, firearms, communications services,
air transportation, policies issued by foreign insurance companies, wagering, water transportation,
removal of hard mineral resources from deep seabeds, chemicals, certain imported substances,
non-deductible contributions to certain employer plans, and many other subjects. The Commonwealth
of Massachusetts charges what it calls an "excise tax" on all vehicles, even though
this is, in fact, an ad valorem tax. Excise duties usually have one or two purposes:
to raise revenue and to discourage particular behavior or purchase of particular items.
Taxes such as those on sales of fuel, alcohol and tobacco are often "justified" on both
grounds. Some economists suggest that the optimal revenue raising taxes should be levied
on sales of items having an inelastic demand, while behavior altering taxes should be levied
where demand is elastic. Most items on the excise tax lists are relatively inelastic
"addictions" with only long term elasticity. One of the most common excises in the United
States is the cigarette tax imposed by both the federal and state governments. This tax
is simply an excise tax applied to each pack of cigarettes. Specifically, the federal government
uniformly charges an excise tax of $1.01 for a standard pack of 20 cigarettes. On top of
the federal tax, all 50 states levy a different cigarette tax that ranges from $0.17 per pack
in Missouri to $4.35 per pack in New York. Overall, the excise taxes constitute most
of the retail cost of cigarettes. Cigarette taxes can be avoided in some jurisdictions
if the consumer purchases loose tobacco and cigarette paper separately or by purchase
of cigarettes from lower taxed states. Excise taxes can be imposed and collected
at the point of production or importation, or at the point of sale and then remitted
to the Internal Revenue Service or state or local taxing agency. Often some excise taxes
are collected by the federal government and then remitted to the states on a partially
matching basis to pay for particular items like interstate highway construction, airport
construction or bridge repairs. Excise taxes are usually waived or refunded on goods being
exported, so as to encourage exports. Smugglers and other tax evaders will often seek to obtain
items at a point at which they are not taxed or taxed much lower and then later sell or
use them at a price lower than the post-tax price in their jurisdiction.
For similar items, excise duties are the same for imported and domestically produced goods;
if the tax is different, then there is an explicit or implicit customs duty or tariff.
An unusual example of a state "excise" tax is found in the State of Hawaii. In lieu of
a sales tax, the State of Hawaii imposes a tax called a General Excise Tax, or GET, on
all business activity in the State. The GET is charged at a rate of 4% for most businesses
and 0.5% for wholesalers. The tax is imposed on all business entities, so in essence, the
tax is collected at every level of production The GET is also charged on all business service
activity such as real estate agent commissions, lawyer fees and the like. A more accurate
tax term would be a value added tax or VAT. With Hawaii's industry heavily dependent on
tourism and tourist spending, the state regularly raises nearly half its government revenues
through the imposition of the GET. Hawaii's GET has been criticized for having a disproportionate
impact on low-income families because of the fact it is charged on intermediary transactions
as well as services, resulting in a pyramiding effect as costs rise in relation to final
retail prices. Excise tax enforcement
The Bureau of Alcohol, Tobacco, Firearms and Explosives, formed in 1886, is a federal law
enforcement organization within the United States Department of Justice. Its responsibilities
include the investigation and prevention of federal offenses involving the unlawful use,
manufacture, and possession of firearms and explosives; acts of arson and bombings; and
illegal manufacturing and trafficking of alcohol and tobacco products that avoid paying the
federal excise taxes on these products. The Internal Revenue Service within the United
States Department of the Treasury is responsible for collecting the over one million excise
tax returns that collects almost $70 billion in excise taxes. IRS publication 510 lists
all the forms, rates, rules etc. on federal excise tax collection. The IRS is authorized
to sue people who violate the excise tax rules and have them incarcerated.
Commentary on excises Samuel Johnson's A Dictionary of the English
Language defined excise in 1755 as "A hateful tax levied upon commodities, and adjudged
not by the common judges of property, but wretches hired by those to whom excise is
paid." See also
Fuel taxes in the United States Cigarette taxes in the United States
References