Excise Taxes on Individual Commodities or Services

Excise taxes are sales taxes on individual commodities, services, or transactions such as motor fuel, cigarettes, or home sales. For example, in recent years, several cities and counties have levied excise taxes on sugar-sweetened beverages.

Excise taxes can serve a useful social purpose. They can discourage the consumption of potentially harmful commodities— such as tobacco, which is harmful to health, and gasoline, which is harmful to the environment. For this reason, they are sometimes referred to as sin taxes.

The public tends to object less to these taxes than to others. This is partly due to 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. For example, cigarette taxes have been 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 indexing them to inflation.

A significant issue with excise taxes is their regressivity. Their regressive nature 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. Typically, lotteries are a regressive way to raise revenue.