Background Paper No. 18
Excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es have been a staple of the Federal tax structure since the beginning days of the Republic. The growing tax reform debate offers a useful occasion to reconsider the use of excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es at the Federal level and possibly to consider including excise tax reform as part of a general overhaul of the Federal tax system. The first section of this paper presents the role and history of excise taxes in the U.S. tax system. The economic efficiency of excises is examined in the second section. The next section discusses the use of excises as means of capturing social costs. The fourth section provides a brief look at the administration, compliance costs, and implementation of excise taxation. The last section focuses on excise taxation and tax fairness, specifically, the relationships between excise taxes and regressivity, lifetime vs. annual income incidence, and the effects of excise taxes on low-income and rural taxpayers.
Historically, the primary reason for introducing excise taxes has been the need for revenue to finance government activities. As the Federal government instituted additional tax sources, such as the payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. and the income tax, the role of the excise shifted as a tax policy tool. Increasingly, excise taxes were treated as user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. s, dedicated to fund specific services or programs provided by the Federal government. More recently, excise taxes have been employed as policy tools intended to capture costs thought to be borne by society at large but created through individual actions.
When excises are levied simply as revenue sources, or to offset perceived societal costs without an accurate assessment of those costs, then the tax can have highly distortionary effects on economic activity, thereby lowering the value o f national output and society’s welfare. Whether an excise has been well-targeted or not, however, by conventional measures of income most excise taxes fall disproportionately on lower-income taxpayers. To the extent a goal of tax policy is to levy a tax on a proportional basis, or even disproportionately on upper-income taxpayers, most excise taxes fail to achieve this objective.Share