Taxes What Is an Excise Tax? Excise Taxes Explained in Less Than 5 Minutes By Beverly Bird Updated on January 9, 2023 Reviewed by Ebony J. Howard Reviewed by Ebony J. Howard Ebony Howard is a certified public accountant and a QuickBooks ProAdvisor tax expert. She has been in the accounting, audit, and tax profession for more than 13 years, working with individuals and a variety of companies in the health care, banking, and accounting industries. learn about our financial review board In This Article View All In This Article How an Excise Tax Works Examples of an Excise Tax Do I Have To Pay an Excise Tax? How Much Revenue Do Excise Taxes Raise? Types of Excise Taxes Frequently Asked Questions (FAQs) Photo: Mlenny / Getty Images Definition An excise tax is one that targets a specific product or activity. An excise tax is levied against a specific product or activity. It's considered to be a "narrowly based" or "indirect" tax because it's levied on certain products or services, not on a specific person. A tax that's levied on a specific individual is referred to as a direct tax. Key Takeaways An excise tax is similar to a sales tax, but it's levied only on certain products or services.The most common excise taxes are imposed on tobacco, alcohol, and gasoline.The Affordable Care Act also provides for an excise tax on some health-related services and products.The tax is generally payable by manufacturers, but they invariably pass the cost on to retailers and retailers ultimately pass it on to consumers.Excise taxes are collected by all 50 states and some municipalities, as well as by the federal government. How an Excise Tax Works Excise taxes are regressive because they impose the greatest financial burden on families that rely on or purchase a good number of these taxed items or services. These individuals are taxed regardless of whether they have the income to support this tax system. Those who earn the least pay about 7.1% of their incomes to excise taxes, according to a study by the Institute on Taxation and Economic Policy. The wealthiest paid only 0.9% of their incomes. Note Excise taxes were much more onerous 70 years ago when they generated a slice of the GDP that was more than five times higher than it is in the millennium. Some of these taxes are levied per unit, such as a flat fee per gallon of gasoline or a pack of cigarettes. Others are "ad valorem" excise taxes. They're a percentage of what you spend rather than a flat fee. For example, you'll pay a 10% excise tax for tanning services. Examples of an Excise Tax You likely paid an excise tax the last time you fueled up your vehicle. The federal government imposed an excise tax of 18.4 cents per gallon of gas as of June 2022, increasing to 24.4 cents per gallon of diesel fuel. President Biden called for a suspension of the tax at that time, through December 2023. But the legislation has stalled in Congress. Note Sumptuary excise taxes are levied on products and activities that aren't considered healthy or wholesome, such as tobacco, gambling, and alcoholic beverages. These are also known as "sin taxes." The excise tax on tobacco products runs about $1.01 per pack. Tanning services are taxed at 10% of the cost under the terms of the Affordable Care Act (ACA). The federal excise tax on distilled liquor is $13.50 a gallon, but that's at the federal level. Residents of Washington State paid $14.27 per gallon of distilled spirits as of January 2022. Do I Have To Pay an Excise Tax? Individuals don't directly pay excise taxes to the federal government, but these ultimately funds come out of their pockets just the same. The tax is typically included or factored into the retail price of the product or service that's purchased. Let's say you pay $4 for a gallon of gasoline. Most of that price is paid for the gasoline that went into your tank, but not all of it. A portion went to the "hidden" excise tax. The tax won't be cited or delineated on your receipt as a sales tax would. How Much Revenue Do Excise Taxes Raise? The U.S. government collected almost $100 billion in various excise taxes in 2019, the last year for which comprehensive statistics are available. Transportation-related excise taxes generated $40.5 billion, or 41% of the total. This money went to the Highway Trust Fund. The Airport and Airway Trust Fund received $16 billion of that $40.5 billion, or 16% of all excise taxes collected. Tobacco excise taxes brought in another $12.5 million, representing 13% of the total. Alcohol sales contributed $10 billion, or 10%. Note Excise taxes made up 2.9% of the federal government's tax revenue in the year cited. Types of Excise Taxes This tax isn't exclusively imposed by the U.S. federal government. All states and some municipalities levy some form of excise tax as well, although veterans, disabled individuals, or charitable organizations are exempt in some states. Boston imposed an excise tax of $25 per each $1,000 of value of all registered vehicles as of October 2022. That value is set by the Massachusetts Registry of Motor Vehicles. The major types of federal excise taxes are those imposed on alcohol, tobacco, airline travel, and motor vehicle fuel. But health-related goods and services are subject to excise taxes, too. Sports wagering, such as you might enjoy online, is subject to federal excise taxes. States tend to focus their excise taxes on "fun" purchases rather than essentials like healthcare. These can include purchases such as alcohol, tobacco, candy, and gambling. But gasoline is subject to state-level excise taxes at times, too. Frequently Asked Questions (FAQs) What does the money raised by federal excise taxes pay for? The federal government collects all this money and deposits about 40% of it into its general fund. Taxes on alcohol, tobacco products, indoor tanning, and health insurance are a few of the taxes that go to the general fund. The other 60% or so goes toward trust funds that are dedicated to paying for transportation, including highway and airport improvements and maintenance, and for health-related spending. Who pays an excise tax? Wholesalers, importers, or manufacturers generally pay this tax to the federal government, but they pass the burden on to retailers, who, in turn, pass it on to consumers. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Institute on Taxation and Economic Policy. "Who Pays? 6th Edition." Tax Policy Center. "What Are the Major Federal Excise Taxes, and How Much Money Do They Raise?" IRS. "Excise Tax." Congress.gov. "H.R.7926—Federal Gas Tax Suspension and Windfall Profits Act of 2022." Congressional Research Service. "Potential Impacts of a Federal Gasoline Moratorium." Page 1. Tax Foundation. "Excise Tax Application and Trends." Alcohol and Tobacco Tax and Trade Bureau. "Tax Rates." Tax Policy Center. "State Alcohol Excise Tax Rates." Mass.gov. "Motor Vehicle Excise."