What is an Excise Tax?

Excise taxes are taxes charged on the production and sale of particular goods. One of the most widespread examples of an excise tax is the additional taxes which many nations levy on alcohol. There are a number of reasons for a nation to mandate the payment of an excise tax, ranging from the desire to raise additional funds to the goal of penalizing people who purchase or use things which are considered harmful. Classically, excise taxes are bundled directly into the cost of an item, which can make them invisible to the consumer.

Unlike things like income taxes, which are paid by the consumer directly, excise taxes are collected by merchants and then sent to the government, much like a sales tax. Merchants are responsible for ensuring that the correct amount is collected, and for passing it on to the government in a timely fashion. It may also be necessary for merchants to receive a special permit from the government which will allow them to collect excise taxes.

In some cases, an excise tax is charged per unit, meaning that merchants collect a flat fee per unit of the product. Other excise taxes are ad valorem taxes, charged according to the value of the item. In both cases, the merchant can opt to include the excise tax in the list price of the item, or to indicate to consumers that the sales price does not include excise and sales taxes. The presence of an excise tax can drive the cost of an item up significantly from the list price, which can be frustrating for consumers.

Excise taxes are often charged on goods which indirectly cost the government and society. Alcohol, for example, contributes to traffic accidents, which require the response of emergency services and medical personnel. Tobacco, another item commonly subjected to excise taxes, also costs the health care system a great deal of money, and some excise taxes on tobacco are also used to pay for tobacco education and cessation programs. Gasoline is another product which is often taxed, with the taxes paying for road upkeep, air quality control measures, and other costs related to gasoline consumption.

Governments have been charging excise taxes since the 1600s, and the system has become much more elaborate and comprehensive than it was when the Dutch first developed it. Governments justify excise tax programs by explaining that they generate needed funds, in addition to reminding consumers that some products are harmful and dangerous, and reducing consumption might be beneficial. Taxpayers and consumers of such products often resent excise taxes because they drive product costs up considerably.