Excise taxes are selective sales taxes on individual commodities, services, or transactions such as motor fuel, cigarettes, or home sales. In recent years, several cities and counties have levied excise taxes on sugar-sweetened beverages.
Excise taxes serve a useful social purpose by discouraging the consumption of commodities that are potentially harmful to health or the environment, such as tobacco and gasoline. For this reason, they are sometimes referred to as “sin taxes.”
The public tends to object less to these taxes than to others, in part because of the nature of the taxed commodities and because people pay the tax only if they choose to purchase the affected good or service. In addition, revenue from these taxes is often used to fund popular programs such as cigarette taxes that are used to help finance expanded health insurance coverage for children in some states. These factors often make excise taxes a politically convenient tool for raising revenue.
Taxes on alcohol, tobacco, and gasoline generally do not automatically keep pace with inflation because they are based on units sold. Thus, revenues do not increase proportionately with price. This issue can be addressed either by changing the tax structure from “per unit” to “ad valorem” (per dollar) or by indexing per-unit taxes for inflation.
A significant issue with excise taxes is their regressivity. The regressive nature of tobacco and alcohol taxes can be mitigated if the revenue is used to finance programs such as health care for those with low incomes.
Government lotteries may be considered a form of excise tax on gambling. As such, lotteries are subject to the general considerations that apply to excise taxes in terms of their revenues, efficiency, burden distribution, revenue use, and other factors. Typically, lotteries are a regressive way to raise revenue.
EXCISE TAXES ON INDIVIDUAL COMMODITIES OR SERVICE: Policy
Motor fuel taxes should be indexed for inflation and increased as necessary to fund transportation infrastructure and services.
Excise taxes on individual commodities, such as tobacco or alcohol, should at least keep pace with inflation. Levying them on an ad valorem basis (i.e., on the value of the purchase) rather than a per unit basis would automatically adjust them for inflation.
The revenue from lotteries and excise taxes should be used to help fund important social programs targeting the populations that are negatively affected by the taxed commodity.