What Are Excise Taxes and Why Are They Going Up?

what are excise taxes

Let's start with the basics. What is an excise tax and how does it differ from a sales tax?

A sales tax is an ad valorem tax -- a percent of the price of the item is tacked on when the consumer buys the item. An excise tax is based strictly on quantity -- the consumer pays a flat amount per item.

Excise taxes started out historically as luxury taxes. The very first two excise taxes in the United States were taxes on carriages and on whiskey. A telephone excise tax started as a luxury tax; so did gasoline. In our country, things that start out as luxuries come to be enjoyed by most people.

Why do states keep turning to them?

Excise taxes are more stable than sales taxes, and sometimes they are easier to pass -- depending on how many users the tax effects. It's harder to raise the tax on beer than on cigarettes. In previous years,

states could patch a hole in their budget by raising an excise tax, but states can't increase excise taxes to raise the kind of revenue they need now.

A lot of states raised excise taxes last year. Can excise taxes keep going up?

People are always pushing harder on these taxes. The revenue total from them hasn't started to decrease, but states that push very high start to see drops. That happens for two reasons. The higher the price, the less people consume the item. A high tax can also create the incentive to get around it. For instance, there can be bootlegging. Someone might fill a truck in Virginia full of cigarettes and drive up to New York City to sell the cigarettes -- without charging the New York excise tax on them. It's illegal. I do not recommend doing this but that's what can happen.

Are states looking around for new excise taxes? If so, where are they looking?

Source: taxfoundation.org

Category: Taxes

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