What Is Excise Tax?
Excise tax refers to an indirect type of taxation imposed on the manufacture, sale or use of certain types of goods and products.
How Excise Taxes Work (With Example)
Excise taxes are commonly included in the price of a product, such as cigarettes or alcohol, as well as in the price of an activity, often gambling. Excise taxes may be imposed by both federal and state authorities.
Excise taxes usually fall into one of two types:
- Ad Valorem; meaning that a fixed percentage is charged on a particular good or product. This administration of the tax is less common.
- Specific; meaning that a fixed currency amount may be imposed depending on the quantity of the goods or products that are purchased. Specific is the most common type.
For example, a bottle of wine that normally costs $10 may have a specific excise tax of $2 imposed on it. As per the intent of the excise tax, the additional cost of the wine is passed onto the consumer, making the retail cost of the bottle $12. While this seemingly does not affect the maker of the wine, who still gains $10 in revenue, an increase in price could potentially reduce quantity demanded, which would indeed affect his balance sheet.
Why Excise Taxes Matter
The implementation of excise taxes allows federal and state governments the means to raise additional revenue necessary for large projects such as social programs.
Excise taxes are most often levied upon cigarettes, alcohol, gasoline and gambling. These are often considered superfluous or unnecessary goods and services. To raise taxes on them is to raise their price and to reduce the amount they are used. In this context, excise taxes are sometimes known as "sin taxes."