What are Excise Taxes?
Excise taxes are taxes on specific goods or services that are typically included in the price of the product or service. Governments claim that they usually impose these taxes to raise revenue, discourage certain behaviors or activities, or to fund specific projects or programs. Excise taxes can be levied at the federal, state, or local level and are typically assessed as a percentage of the purchase price or as a fixed amount per unit.
Examples of products or services subject to excise taxes include gasoline, tobacco products, alcohol, firearms, air transportation, and specific environmental hazards. The revenue generated from excise taxes is typically used to fund specific government programs or initiatives, such as infrastructure projects, public health initiatives, or education programs.
The federal government imposes excise taxes on various products and services in the United States, including gasoline, tobacco products, firearms, and airline tickets. State and local governments may also impose excise taxes instead of federal ones.
Excise taxes can be controversial, with some arguing that they unfairly target certain products or industries and burden consumers. I say that excise taxes disproportionately affect the poor and middle class and that there are more appropriate solutions for supporting our government needs through taxes. Others say that excise taxes are an effective way to raise revenue and discourage certain behaviors that can negatively impact public health or the environment. But using excise taxing in this way is not among the most effective ways to help with public health and the environment.
In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, by Dr. Mitch, he explains how and why excise taxes are unfair and less effective than other ways to improve public health and the environment.
History of Excise Tax
Excise taxes have a long history in the United States, dating back to colonial times. The government has used these taxes to fund various programs and services, regulate certain industries, and promote public health. In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch relates in his chapter on the history of taxation other interesting facts that go beyond the history presented here.
Early History of Excise Taxes in the United States
The British government imposed the first excise tax in the United States on the colonies in 1764. The tax, which was levied on sugar, molasses, and other goods, was designed to raise revenue for the British government. The colonists were outraged by the tax, which they saw as violating their rights as British subjects. The tax was eventually repealed, but the incident served as a precursor to the American Revolution.
During the Revolutionary War, the Continental Congress levied excise taxes on various goods to fund the war effort. These taxes were often unpopular, leading to protests and even riots in some areas. After the war, the new United States government continued using excise taxes to generate revenue.
Early excise taxes in the United States were levied on goods such as alcohol, tobacco, and sugar. These taxes were often used to fund specific government programs, such as constructing roads and canals. In the early 19th century, the government began using excise taxes to regulate industries.
The Whiskey Rebellion
One of the most significant events in the history of excise taxes in the United States was the Whiskey Rebellion. In 1791, the government imposed an excise tax on distilled spirits, including whiskey. The tax was highly unpopular in Western Pennsylvania, where many farmers relied on producing and selling whiskey to make a living. In 1794, a group of farmers and distillers organized a protest which eventually turned violent. President George Washington ordered troops to the region to put down the rebellion. The rebels were eventually defeated, and the incident served as a reminder of the power of the federal government to enforce its laws.
The Civil War and Beyond
During the Civil War, the government imposed excise taxes on various goods to fund the war effort. These taxes were later extended to cover a range of industries, including firearms, telegraphs, and even playing cards. In the early 20th century, the government imposed excise taxes on automobiles and gasoline to fund the construction of roads.
In the 1930s, the government introduced a tax on alcohol to fund programs to combat alcoholism. The tax was later increased and extended to cover other goods, including tobacco products. These taxes have been used to fund various programs and services, including public health initiatives and infrastructure projects.
Recently, there has been renewed interest in using excise taxes to promote public health and combat social issues. For example, many states have introduced taxes on sugary drinks to reduce obesity and diabetes rates. Additionally, there has been increased interest in using excise taxes to address environmental issues, such as carbon emissions. However, this methodology has yet to be proven as an effective deterrence, or more effective than other legislative approaches. Some of these alternative legislative approaches are described in A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, by Dr. Mitch.
Common Excise Tax Products
Excise taxes can apply to a wide range of products and services. Some common examples include:
- Tobacco products, such as cigarettes, cigars, and smokeless tobacco
- Alcohol, including beer, wine, and distilled spirits
- Gasoline and other fuels, such as diesel and jet fuel
- Firearms and ammunition
- Luxury goods, such as high-end cars or yachts
- Air transportation, such as airline tickets and aviation fuel
- Environmental hazards, such as chemicals or hazardous waste
- Communication services, such as telephone and Internet services
- Medical devices, such as prosthetics and pacemakers
Specific products and services subject to excise taxes can vary by country and jurisdiction. For example, the federal government imposes excise taxes on a wide range of products and services in the United States. Additionally, many state and local governments impose their excise taxes on top of federal taxes.
Why Excise Taxes are Controversial.
Excise taxes have long been debated with advocates and opponents presenting arguments on both sides. While excise taxes can effectively raise revenue and discourage behaviors that can negatively impact public health and the environment, they are also regressive and burden low-income and middle-income consumers disproportionately.
One of the main arguments against excise taxes is that they are regressive, meaning they disproportionately affect lower-income and middle-income individuals and families. This is easily seen for excise taxes on products like tobacco, alcohol, and gasoline, which low-income consumers tend to use more heavily.
For example, a person living in a rural area with limited public transportation may need to drive long distances to work and may require the means to purchase a fuel-efficient vehicle. As a result, a gasoline tax significantly impacts their finances, and forces them to allocate more of their income toward transportation expenses.
Similarly, taxes on products like tobacco and alcohol also impact low-income individuals more heavily, who tend to use these products more than high-income earners. Studies have shown that lower-income individuals are more likely to smoke and consume alcohol at higher levels than higher-income individuals. Even high-income earners who smoke and drink can only consume so much of these products, and the excise taxes imposed on them are less significant items in their budgets. As a result, taxes on these products place a disproportionate burden on lower-income consumers.
Another problem with excise taxes is that they do not justify those results that are a part of their rationale. For example, taxes on tobacco products and alcohol will not significantly reduce consumption among heavy users, who are often addicted to these products. Similarly, taxes on gasoline and other fuels may not significantly reduce overall consumption or encourage public transportation, particularly in areas with limited access to these options.
Despite these concerns, there are also strong arguments favoring excise taxes. These taxes can effectively raise revenue for critical public health and environmental initiatives. In addition, taxes on products like tobacco and alcohol can help discourage excessive consumption, which can lead to various health problems and associated costs for individuals and society.
However, no data suggest that because of the price of alcohol and tobacco, people are going without. If anything, the prices are high, and people are finding alternative ways to get alcohol and tobacco. Excise taxes are likely not to discourage excessive consumption.
Ultimately, the controversy surrounding excise taxes in the United States highlights the difficult balancing act that policymakers must navigate when making decisions about tax policy. While excise taxes can effectively raise revenue and theoretically discourage negative behaviors, they also place a disproportionate burden on low-income consumers, who may already be struggling to make ends meet.
As a result, it’s crucial for policymakers to carefully consider the implications of excise taxes on all segments of the population and to work to mitigate their negative impacts on low-income individuals and families. In in A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch examines the inherent unfairness in this and other ways that government fund its functions and programs and proposes a solution rooted in practicality and universally held concepts of justice.
Lower Income People are Impacted the Most
Excise taxes disproportionately impact lower-income individuals, as they tend to spend a higher proportion of their income on goods and services subject to these taxes. Excise taxes increase the cost of essential goods and services, which can further strain already tight budgets. For example, suppose a person relies on a car to get to work or access essential services. In that case, an excise tax on gasoline can increase their transportation costs and reduce their disposable income for other needs, such as food or housing.
Excise taxes create unintended consequences, such as the growth of black markets for the evasion of taxes. Lower-income individuals who may already be struggling to make ends meet may turn to cheaper, unregulated products, which can be dangerous or of lower quality. Moreover, evasion of taxes leads to reduced revenue for the government, which can impact social programs and services.
How Much Are Americans Actually Paying in Excise Taxes?
According to data from the U.S. Department of the Treasury, in the fiscal year 2021 (October 2020 – September 2021), the total excise tax revenue collected by the federal government was approximately $97.3 billion. It is worth noting that state and local governments also levy excise taxes, and the total amount of revenue generated by excise taxes in the United States is, therefore, higher than the federal excise tax revenue alone. However, the specific amount generated by state and local excise taxes can vary widely depending on the state and the type of tax in question.
According to the Tax Foundation, in the fiscal year 2021, states collected an estimated $20.1 billion in excise tax revenue, with the largest categories being gasoline, cigarette, and alcohol taxes. Therefore, the total revenue generated by excise taxes in the United States (federal, state, and local) in the fiscal year 2021 is estimated to be approximately $117.4 billion.
That’s $117.4 billion taken directly out of the pockets of the poor and middle class. In A Taxing Problem. The Psychologist’s Prescription for a Just Tax System, Dr. Mitch demonstrates how this and other ways of raising revenue for government and its programs are unfair. How this unfairness results in the anger and frustration seen in the United States, and indeed, the world today. He demonstrates how this anger and experienced unfairness results in a more violent society. And more importantly, he provides the solution. His book is available in paperback, for download, and in audiobook formats.