What is an excise tax?Published:
Understand why the government taxes certain goods and not others.
Interstate road trips are hard enough (when they involve family), so why should the government want to take a piece of them? Gasoline.
On that trip, you might have noticed the price of gasoline raise or lower when you crossed from one state into another. Any smoker in the vehicle will also notice a difference in the cost of their 'vice' when crossing state borders. That is because excise taxes vary from state to state, which exerts pressure on pricing.
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An excise tax is an amount of money the government charges. For cigarettes and gasoline, the tax is levied per unit of the good sold. So when you buy a pack of cigs in Nevada, 80 cents of your purchase is automatically 'donated' to the government. If you head to Utah, the tax becomes $1.70 a pack.
You might also notice that cigarettes in Utah do not cost strictly $0.90 cents more than they do in Nevada. That might seem strange because the difference in the excise taxes is $0.90, so it would make sense for you to pay exactly $0.90 more. But that is not how the cookie crumbles.
Businesses will eat some of the cost in order to keep their prices competitive and enticing. When the price reduces, they lose some of their profits per good, but they are able to sell more of the product, which could lead to their benefit, overall. On the consumer side, you might be willing to make sacrifices to keep up your normal habit, but this willingness would only last to a point. When an excise tax is levied, business and consumer meet in the middle. This is true no matter how the tax is enacted.
Some excise taxes are taken when the good is purchased (from the consumer). You might see the tax on your receipt, on a line separate from the sales tax. In this case, even though it looks like you are the only party receiving the brunt of the burden, the business has likely reduced the base cost of the good.
In other cases, the taxes will be levied on the business directly. You never see the tax, but you will feel the sting of a heftier price. When you purchase the good, you are subject to an additional sales tax, which is levied on the total price of the item.
The government uses the same power to provide tax credits for do-good products, such as biodiesel. In this way the government tries to sway more attention to environmentally friendly goods and away from harmful vices.
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The Internal Revenue Service collected $55 billion in excise taxes in 2012, which is 2.6% of the total U.S. tax obligation. These taxes are only a small portion of the total country's excise taxes because states individually collect taxes on a unique assortment of goods. For a complete listing of Federal excise taxes, see IRS Publication 510.