Excise Tax

What is Excise Tax?

Excise tax is the tax imposed on the sale or production of specific goods and services which have an impact on the economy and how the society functions. Usually, these taxes are collected at the time of manufacturing, sale, or import.

Excise taxes are often placed on products like tobacco, alcohol, gasoline in order to prevent and deter excessive use or to address environmental pollution. These type of taxes are then used to finance public initiatives and also fund vital services such as healthcare, education, and infrastructure.

In the United States, excise taxes are implemented at three different levels- federal, state, and local. The federal government collects excise tax on goods like gasoline, firearms, and medical services. State and local governments can impose their own taxes in addition to the federal taxes.

Types of Excise Taxes

Excise taxes are categorized into two main types:

1. Ad Valorem Tax (Tax Based on Value)  

Ad Valorem taxes are levied as a percentage of the retail price of a product or service. The amount taxed can fluctuate based on the product’s price.  

Examples:
10% excise tax is levied on indoor tanning services,10% federal excise tax is levied on firearms, 7.5% excise tax on airfare, etc.

2. Specific Tax (Tax Based on Unit)  

In this type, regardless of its price, certain excise taxes are imposed as a set dollar amount per unit. This type of tax is calculated based on measurable quantities like weight, volume, or size.

Examples:
Cigarettes are taxed at $1.01 per pack of 20, beer costs $3.50 for the first 60,000 barrels if its produced by small brewers, etc.