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, motor fuel taxes fund highways. 

Excise taxes can serve a useful social purpose. They can discourage the consumption of potentially harmful commodities, such as tobacco. 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 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. Using revenue to finance programs for populations with low incomes may mitigate their regressive nature. 

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. 



Gasoline taxes

Motor fuel taxes should be indexed for inflation and increased as necessary to fund transportation infrastructure and services.

Other excise taxes

Excise taxes on individual commodities, such as tobacco or alcohol, should at least keep pace with inflation. One way to do this is by levying them on an ad valorem basis. 

The revenue from lotteries and excise taxes should be used to help fund important social programs benefiting the populations that are negatively affected by the taxed commodity.