An excise tax is a tax on a specific product or activity — gasoline, cigarettes, airline tickets, alcohol — that’s usually paid to the government by the manufacturer, importer, or retailer and folded into the price you see on the shelf. It works quietly: you rarely notice it, because there’s no separate line on your receipt the way a sales tax appears. Governments use excise taxes to raise money, to fund infrastructure tied to the taxed product, and to make certain goods expensive enough that people buy less of them. Federal excise taxes alone brought in nearly $90 billion in 2022, about 1.8 percent of federal tax receipts.1Tax Policy Center. What Are the Major Federal Excise Taxes, and How Much Money Do They Raise?
How They Differ From Sales Taxes
A general sales tax applies broadly to most retail purchases and shows up as a line item at checkout. An excise tax targets a narrow list of goods and activities, and it’s typically already inside the price before you get to the register. The business — manufacturer, importer, or retailer — is the one legally on the hook. Most file Form 720 with the IRS on a quarterly basis to report and pay federal excise taxes.2Internal Revenue Service. About Form 720, Quarterly Federal Excise Tax Return Because the cost is baked in, most consumers never realize they’re paying it.3Internal Revenue Service. Basic Things All Businesses Should Know About Excise Tax
State and local governments also levy their own excise taxes, most visibly on cigarettes, alcohol, motor fuel, and now recreational marijuana in states that have legalized it. Marijuana is worth flagging because it’s an exception to the federal system: since it remains federally illegal, there is no federal excise tax on it, and everything collected is at the state level.
Two Ways Excise Taxes Are Calculated
Every excise tax uses one of two structures, and knowing which one is in play tells you a lot about how the tax behaves over time.
A specific excise tax is a flat dollar amount per unit. The federal gasoline tax is 18.4 cents per gallon whether gas sells for $2.50 or $4.00.4Office of the Law Revision Counsel. 26 USC 4081 — Imposition of Tax The federal cigarette tax is $50.33 per thousand small cigarettes, which works out to about $1.01 on a standard 20-pack.5Office of the Law Revision Counsel. 26 USC 5701 — Rate of Tax Distilled spirits carry a federal rate of $13.50 per proof gallon.6Office of the Law Revision Counsel. 26 USC 5001 — Imposition, Rate, and Attachment of Tax Specific taxes are simple to administer, but inflation slowly hollows them out: the federal gas tax hasn’t been raised since 1993, and a gallon of gas cost around $1.10 back then.
An ad valorem excise tax is a percentage of the price. The domestic airline ticket tax is 7.5 percent of the fare, so a $400 flight generates more tax than a $150 one.7Office of the Law Revision Counsel. 26 USC 4261 — Imposition of Tax Ad valorem taxes keep pace with prices automatically. Specific taxes don’t, unless Congress raises the rate.
Why Governments Impose Them
Excise taxes exist for three overlapping reasons.
Revenue
The simplest reason is money. In 2022, highway-related excise taxes brought in $41.5 billion, tobacco taxes brought in $11.3 billion, and alcohol taxes contributed another $10.2 billion.1Tax Policy Center. What Are the Major Federal Excise Taxes, and How Much Money Do They Raise? Additional revenue comes from health-related goods, airline travel, and other taxed activities.8Internal Revenue Service. Excise Tax Statistics It’s a small share of the federal budget compared with income and payroll taxes, but a steady one.
Dedicated Funding for Related Infrastructure
Some excise taxes are user fees in disguise. The people using a resource pay for the infrastructure supporting it. Fuel taxes are the clearest example. Congress created the Highway Trust Fund in 1956 to build the Interstate Highway System, and fuel taxes still supply about 85 percent of its highway account’s annual revenue, currently at 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel.9Congress.gov. The Highway Trust Fund’s Highway Account
Aviation follows the same pattern. The Airport and Airway Trust Fund collects excise taxes on passenger tickets, cargo shipments, and aviation fuel to pay for airport improvements, air traffic control, and aviation research.10Federal Aviation Administration. Airport and Airway Trust Fund Fact Sheet Drivers fund roads; passengers fund airports.
Discouraging Harmful or Polluting Consumption
Excise taxes on tobacco and alcohol are sometimes called “sin taxes” because the goal isn’t just revenue — the goal is to make the product expensive enough that people buy less of it, especially price-sensitive buyers and younger consumers. In high-tax states, taxes can account for more than half the retail price of a pack of cigarettes once federal and state levies stack.
The same logic drives environmental excise taxes. Fuel taxes make driving more expensive and push consumers toward efficient vehicles or alternatives to driving. The Superfund excise tax on petroleum and certain industrial chemicals, originally created to fund cleanup of hazardous waste sites and reinstated in 2022 through the Infrastructure Investment and Jobs Act, taxes crude oil received at refineries and dozens of listed chemicals. For 2026, the petroleum rate under Section 4611 rises to $0.18 per barrel.11Office of the Law Revision Counsel. 26 USC 4611 — Imposition of Tax12Internal Revenue Service. Instructions for Form 6627 Taxes on ozone-depleting chemicals work the same way, rising by statute over time so manufacturers move toward safer alternatives.
Who Actually Pays
The business writing the check to the IRS isn’t necessarily the one bearing the cost. Manufacturers, importers, and retailers remit excise taxes, but how much of that cost ends up in the sticker price depends on the market.3Internal Revenue Service. Basic Things All Businesses Should Know About Excise Tax
For products with few good substitutes, like gasoline and cigarettes, consumers absorb most of the tax. Demand doesn’t drop much when prices rise, so producers pass the cost through and keep their volumes. For products where buyers can easily switch to an untaxed alternative, producers eat more of the tax themselves to avoid losing customers. That’s a big part of why excise taxes on addictive goods are such reliable revenue generators: the demand barely moves.
One consequence is worth naming. Federal excise taxes are regressive, meaning they take a larger share of income from lower-income households than from higher-income ones.13Tax Policy Center. Are Federal Taxes Progressive? A household earning $30,000 pays the same 18.4 cents per gallon as a household earning $300,000, and that flat charge is a much bigger bite of the smaller paycheck. Taxed goods like gasoline and tobacco have practical per-person consumption ceilings, so wealthier buyers don’t scale up their usage proportionally, and the tax as a share of their income shrinks. This is the built-in tension in sin taxes: the people most likely to respond to higher prices are the people with the least money to spare, which is exactly why the tax changes their behavior — and also exactly why it hits their budgets hardest.