Federal Excise Taxes: Background and General Analysis

October 15, 2021 R46938

Federal Excise Taxes: Background and General October 15, 2021
Analysis
Anthony A. Cilluffo
In the tax policy context, excise taxes are selective taxes on specific consumption or behavior (in
Analyst in Public Finance
contrast with sales taxes, which tend to apply to all consumption, with some exceptions). Today,

federal excise taxes apply to a variety of goods and economic activities, such as alcohol, tobacco,
firearms and ammunition, gasoline, airline passenger tickets, and indoor tanning services.

There are four common types of excise taxes:
1. Sumptuary (or “sin”) taxes: Historically imposed for moral reasons, but are currently levied, in part, to discourage
a specific activity that is thought to have negative spillover effects (or externalities) on the consumer and society.
2. Regulatory taxes: Imposed to offset external costs associated with regulating public safety or to discourage
consumption of a specific commodity that is thought to have negative externalities on society.
3. Benefit-based taxes (or user charges): Imposed to charge users of a particular public good (e.g., a highway or
national park) for financing and maintenance of that public good.
4. Luxury taxes: Often imposed to raise revenue, particularly from higher-income households.
Excise taxes have generally played a diminishing role in financing the federal government since the middle of the 20th
century. Congress has taken legislative action to eliminate several categories of excise taxes, such as the luxury taxes on
boats, aircraft, jewelry, and furs. Most excise tax rates that remain in statute have declined in value over time, as
congressional action to increase rates has not kept pace with inflation. The federal government has also increasingly relied
upon other sources of revenue—especially individual income and payroll taxes—to finance public services. In FY1940,
federal excise tax revenue comprised 30.2% of federal revenue. In FY2020, federal excise taxes raised 2.5% of total revenue.
Excise taxes tend to be regressive, meaning that households with lower incomes generally pay a larger share of their income
in excise taxes than households with higher incomes. Because excise taxes generally increase the price of the taxed
commodity, they also tend to lower consumer demand.
Congress has expressed interest in a number of potential modifications to federal excise tax policy. Some long-standing
excise tax proposals to correct alleged social costs have resurfaced from time to time in policy discussions. These proposals
are sometimes targeted toward specific products or activities (e.g., a sugar-sweetened beverages tax), whereas others would
affect a broad range of economic activity and potentially raise a significant amount of revenue (e.g., a carbon tax). There is
also interest in reducing current excise tax rates as a means to encourage short-term growth in particular industries.
Congressional Research Service

link to page 22 Federal Excise Taxes: Background and General Analysis

Introduction
In the tax policy context, excise taxes are selective taxes on specific consumption or behavior (in
contrast with sales taxes, which tend to apply to all consumption, with some exceptions). Today,
federal excise taxes apply to a variety of goods and economic activities, such as alcohol, tobacco,
firearms and ammunition, gasoline, airline passenger tickets, and indoor tanning services.
There are four common types of excise taxes:1
1. Sumptuary (or “sin”) taxes: Traditionally imposed for moral reasons, but are
currently rationalized, in part, to discourage a specific activity that is thought to
have negative spillover effects (or externalities) on consumers and society.2
2. Regulatory taxes: Imposed to offset external costs associated with regulating
public safety or to discourage consumption of a specific commodity that is
thought to have negative externalities on society.
3. Benefit-based taxes (or user charges): Imposed to charge users of a particular
public good (e.g., a highway or national park) for financing and maintenance of
that public good.
4. Luxury taxes: Often imposed to raise revenue, particularly from higher-income
households.3
The role of excise taxes has changed over time. Excise taxes narrowly imposed on the
consumption of certain products, such as alcohol and tobacco, formed the basis for a significant
portion of federal tax revenue until the modern income tax was enacted in the early 20th century.
Although excise taxes have played a diminishing role as a federal revenue source over time, there
is persistent interest in using excise taxes to raise revenue or discourage behavior that is believed
by some to have negative effects on society (e.g., a tax on carbon emissions). There is also
interest in reducing current excise tax rates as a means to encourage short-term growth in
particular industries.
This report provides an introduction to and general economic and policy analysis of excise taxes.
It first provides a brief history of U.S. excise tax policy, and then discusses trends in federal
excise tax revenues and the uses of that revenue. The report next describes the various forms of
excise taxes and their respective administrative advantages and disadvantages, then analyzes the
economic effects of particular types of excise taxes. These effects on consumer behavior and
equity among taxpayers may be important issues for assessing current excise tax policy or
designing new excise taxes. The Appendix provides a list of references to other CRS resources
on specific excise taxes.4

1 This list is not exhaustive. For example, rationing taxes have been temporarily levied in order to reduce the
consumption of critical supplies during wartime (e.g., rubber) and import duties are basically excise taxes levied on
imports. Additionally, this list and, more broadly, this report discuss excise taxes in the economic and policy contexts.
Legal analysis of the meaning of the term excise taxes and of the different types of excise taxes is beyond the scope of
this report.
2 Economists also refer to taxes applied to an activity generating negative externalities as a “Pigovian tax.” This type of
tax is named after economist Arthur Pigou, who developed the concept of economic externalities. In the United States,
sumptuary taxes often refer to taxes on alcohol and tobacco consumption, gambling, and marijuana consumption.
3 Excise taxes were previously imposed on luxury vehicles, furs, yachts, and other luxury goods. However, most of
these provisions have either expired or been repealed over the years.
4 For a comprehensive list of federal excise taxes and their tax rates (as of 2015), see U.S. Congress, Joint Committee
Congressional Research Service

1

Federal Excise Taxes: Background and General Analysis

History of Federal Excise Taxes
Federal excise taxes have had a dynamic role within the U.S. tax system. The history of the
federal excise tax system often coincides with wars, when excise taxes have served as an
emergency source of funds, or reflects periodic concerns about rising budget deficits.5 New excise
taxes or changes to existing tax rates have often been used for the control of social costs and as
user charges in recent years.
Excise taxes played a key fiscal role in the early history of the United States. The federal
government initially relied on customs duties (tariffs) on foreign trade. In 1791, during George
Washington’s presidency, Secretary of the Treasury Alexander Hamilton implemented the first
federal excise tax on whiskey. The whiskey tax was used as a means to fund the fledgling federal
government, repay debts from the American Revolution, and help establish federal supremacy
over the states.6 The burden of the tax was controversial along both geographical (westerners on
the frontier tended to both consume more whiskey and use it as a medium of financial exchange)
and ideological (Federalists versus Anti-Federalists) divisions. This opposition peaked in the
Whiskey Rebellion of 1794 in southwestern Pennsylvania, where President Washington deployed
13,000 troops to suppress an armed rebellion.
Federal excise taxes expanded after the suppression of the Whiskey Rebellion in 1794. Congress
passed excise taxes on tobacco, snuff tobacco, sugar, and carriages.7 In 1797, a direct tax was
imposed on the ownership of houses, land, and slaves as tariff revenue declined during a period
when European powers were at war. The taxes’ unpopularity contributed to Thomas Jefferson’s
victory over Federalist Party candidate John Adams during the presidential election of 1800.8 All
internal excise taxes were repealed in 1802, as the fiscal demand arising from the war in Europe
abated.9
Federal excise taxes played a significant role in public finances throughout the 1800s. Excise
taxes were temporarily reintroduced during the War of 1812, but were repealed from 1817 until
the Civil War.10 Following the onset of the Civil War, Congress passed the Revenue Act of 1861,
which restored earlier excise taxes.11 Most of these excise taxes were repealed after the end of the

on Taxation, Present Law and Background Information on Federal Excise Tax Rates, JCX-99-15, July 2015, at
https://www.jct.gov/publications/2015/jcx-99-15/. The JCT study classifies some provisions as “excise taxes,” although
these provisions are often thought of as “penalties” for certain types of behavior (e.g., the Affordable Care Act’s
penalty for employers who do not provide “adequate” and “affordable” health care coverage to their employees).
Subsequent to that publication, some of the Affordable Care Act taxes were eliminated in 2019: the medical device tax,
the tax on certain high-value insurance policies (popularly known as the “Cadillac tax”), and the health insurance
industry fee. Alcohol taxes were temporarily reduced, primarily for small producers, in 2017, with the reductions made
permanent in 2020. For a current list of alcohol taxes, see https://www.ttb.gov/tax-audit/tax-and-fee-rates, on the
Department of the Treasury’s Alcohol Tax and Trade Bureau’s website.
5 For an earlier history of federal excise taxes, see Tax Foundation, Federal Excise Taxes, June 1, 1956, at
http://taxfoundation.org/article/federal-excise-taxes.
6 Steve Simon, “Alexander Hamilton and the Whiskey Tax,” U.S. Department of the Treasury, at https://www.ttb.gov/
public-information/special-feature.
7 Tax Foundation, Federal Excise Taxes, June 1, 1956, p.9, at http://taxfoundation.org/article/federal-excise-taxes.
8 Robert L. Einhorn, American Taxation, American Slavery (Chicago, IL: University of Chicago Press, 2008); and Joel
S. Newman, “Slave Tax as Sin Tax: 18th and 19th Century Perspectives,” Tax Notes, November 21, 2003.
9 Robert L. Einhorn, American Taxation, American Slavery (Chicago, IL: University of Chicago Press, 2008); and Joel
S. Newman, “Slave Tax as Sin Tax: 18th and 19th Century Perspectives,” Tax Notes, November 21, 2003.
10 Tax Foundation, Federal Excise Taxes, June 1, 1956, p.9, at http://taxfoundation.org/article/federal-excise-taxes.
11 The Revenue Act of 1861 also temporarily imposed the first income tax, which was implemented in 1862. The
Congressional Research Service

2

Federal Excise Taxes: Background and General Analysis

Civil War, with taxes on distilled spirits and tobacco remaining in effect. In the decades after the
Civil War, excise taxes accounted for between one-third and one-half of all federal revenue.12
Excise taxes were the single largest source of internal revenue during this era.13
During the Spanish-American War (1898), excise tax revenue was a larger source of federal tax
collections than customs duties on foreign imports, as revenue from tariffs often declined during
wartime. Emergency excise taxes were levied on a variety of items, such as pianos, playing cards,
yachts, and billiard tables, to fund military spending. After the war ended, most of these
emergency excise taxes were repealed.
Excise taxes were utilized to fund wartime spending during the early 20th century. Temporary
excise tax provisions were imposed in the Revenue Act of 1918, passed during World War I, to
help fund wartime spending, including the first excise tax on firearms, shells, and cartridges. As a
result, excise tax collections quadrupled from 1914 to 1919.14 Excise tax revenues declined
significantly after the beginning of Prohibition (falling to less than half of pre-Prohibition revenue
levels by 1930) but rebounded above pre-Prohibition levels after the consumption of alcohol was
made legal again after 1933.15 Existing excise tax rates were increased again virtually across the
board around the time of World War II, and new taxes on luxury goods (such as furs) were
introduced.16 Additionally, Congress rejected adopting a general sales tax twice during this era
(1932 and 1942), despite critiques that the costs of administering excise taxes to a growing list of
products were high and the revenue gained from many excise taxes was small.17
Excise taxes underwent a time of dynamic reform during the latter half of the 20th century. The
Revenue Act of 1951 increased many excise tax rates in existence at the time (such as alcohol and
tobacco) and increased the tax base for some user charges. However, the Excise Tax Reduction
Act of 1954 (P.L. 83-324) and the Excise Tax Reduction Act of 1965 (P.L. 89-44) reduced the
number of provisions and their respective tax rates. In particular, the Excise Tax Reduction Act of
1965 eliminated most federal excise taxes with the goal being to “help sustain economic
expansion.”18
Certain excise taxes were also expanded, in part, to reflect a desire for a wider federal role in
domestic affairs.19 For example, the modern highway system’s development shows this linkage

income tax was repealed in 1872.
12 By comparison, trade tariffs produced from one-half to two-thirds of all revenue in the decades after the Civil War,
whereas proceeds from federal land sales accounted primarily for the remainder of revenue collections. See Lance E.
Davis and John Legler, “The Government in the American Economy, 1815-1902: A Quantitative Study,” The Journal
of Economic History, vol. 26, no. 4 (December 1966), pp. 514-552.
13 During parts of this time period, only customs duties outnumbered excise tax collections as the primary source of
federal revenue.
14 Tax Foundation, Federal Excise Taxes, June 1, 1956, p.11, at http://taxfoundation.org/article/federal-excise-taxes.
15 See Table 3 in Tax Foundation, Federal Excise Taxes, June 1, 1956, p.14, at http://taxfoundation.org/article/federal-
excise-taxes.
16 See Revenue Act of 1940 (P.L. 76-656), Revenue Act of 1941 (P.L. 77-250), Revenue Act of 1942 (P.L. 77-753),
and Revenue Act of 1943 (P.L. 78-235); and Tax Foundation, Federal Excise Taxes, June 1, 1956, p.17, at
http://taxfoundation.org/article/federal-excise-taxes.
17 See W.C. Bryant, “Key Republicans Toss Political Dynamite Into Laps of Leaders: Ask Excise Tax Raise,” Wall
Street Journal, October 21, 1947, p. 5.
18 U.S. Congress, Senate Committee on Finance, Senate Report on the Excise Tax Reduction Act of 1965, 89th Cong., 1st
sess., June 14, 1965, S. Rpt. 89-324 (Washington: GPO, 1965), p. 1. Many of the scheduled reductions and taxes
repealed by the act were delayed until the late 1960s and early 1970s. See Joseph Pechman, Federal Tax Policy, 3rd ed.
(Washington, DC: Brookings Institution Press, 1977), p. 189.
19 See R. Rudy Higgins-Evenson, “Financing for a Second Era of Internal Improvements,” Social Science History, vol.
Congressional Research Service

3

link to page 8 Federal Excise Taxes: Background and General Analysis

between excise taxes and the expansion of federally provided public goods. The Highway
Revenue Act of 1956 (Title II of P.L. 84-627) increased the federal gasoline tax (in effect since
1932) and directed its collections from the Treasury’s General Fund specifically toward funding
of public highways.20 Specific excise taxes linked to trust funds related to air travel, mining,
waterway travel, oil spills, and other hazardous chemicals (among others) were created in the
1970s and 1980s. A rising budget deficit helped to bring about the excise tax increases in the
Omnibus Budget Reconciliation Act of 1990 (OBRA90; P.L. 101-508). OBRA90 increased tax
rates on distilled spirits (last increased in 1985), beer and wine (last increased in 1951), tobacco
(last increased in 1982), and gasoline (last increased in 1982).
In recent decades, excise taxes have played a diminishing role in the mix of federal revenue
sources even as new provisions have been introduced. As discussed in the “Revenue” section,
excise tax collections have nominally increased in recent years, but have not changed as much in
inflation-adjusted (real) values. Excise taxes have also fallen as a share of overall federal revenue.
The excise tax rate on gasoline, the largest federal excise tax by revenue, has remained unchanged
and unadjusted for inflation since 1997. The excise tax on tobacco was last increased with the
Children’s Health Insurance Program Reauthorization Act of 2009 (P.L. 111-3), but revenue from
the tobacco tax has declined over time in part due to decreased demand for tobacco products.
Alcohol taxes were reduced, by allowing a reduced rate on lower quantities of production and the
provision of credits, temporarily in the 2017 tax law (P.L. 115-97, commonly referred to as the
“Tax Cuts and Jobs Act”) and permanently in the Consolidated Appropriations Act, 2021 (P.L.
116-260).
Several new excise taxes were created by the Affordable Care Act (P.L. 111-148 and P.L. 111-152,
as amended), enacted in 2010, such as taxes on indoor tanning bed services, medical devices, and
certain high-value insurance plans. The taxes on medical devices and certain high-value insurance
plans, as well as a health insurance industry fee, were later fully repealed in the Further
Consolidated Appropriations Act, 2020 (P.L. 116-94).
The future role of federal excise taxes in federal policy is still unclear. Excise taxes in the form of
user charges could continue to play a role in financing public goods and services. Excise taxes
could be one tool to raise revenue, particularly in the absence of a general consumption tax at the
federal level.21 Some long-standing excise tax proposals to correct a perceived social issue have
also resurfaced in policy discussions. Some of these proposals could be targeted toward specific
products or activities (e.g., a sugar-sweetened beverages tax), whereas others could affect a broad
range of economic activity and potentially raise a significant amount of revenue (e.g., a carbon
tax).22

26, no. 4 (Winter 2002), pp. 623-651.
20 For more information on financing public highways, see CRS Report RL30304, The Federal Excise Tax on Motor
Fuels and the Highway Trust Fund: Current Law and Legislative History, by Sean Lowry.
21 Congressional interest in enacting consumption taxes has been low. For example, a type of national consumption
tax—a value-added-tax—has been explicitly rejected by Congress in the past. The Senate voted 85-13 on a resolution
rejecting a value-added-tax (VAT) in 2010. See S.Amdt. 3724 (111th Cong.).
22 The Congressional Budget Office (CBO) estimated in 2008 that a tax on sugar sweetened beverages set at 3 cents per
12 ounces could raise $50.4 million in revenue in five years. In 2020, CBO estimated that a tax on greenhouse gas
emissions could raise $1.0 trillion over 10 years. See CBO, Budget Options Volume 1: Health Care, December 2008, p.
192, at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/99xx/doc9925/12-18-healthoptions.pdf; and CBO,
Options for Reducing the Deficit: 2021 to 2030, at https://www.cbo.gov/budget-options/56873.
Congressional Research Service

4

link to page 8

Federal Excise Taxes: Background and General Analysis

Revenue
Since the end of World War II, excise taxes have comprised a diminishing portion of federal
revenues. At the same time, federal excise tax revenue has fallen as a share of GDP. However,
excise taxes have remained important public policy tools as they have increasingly been used as a
source of dedicated revenue to directly fund certain federal government programs.
Historical Trends
Excise taxes have had a diminishing role in federal public finance over time. Several forms of
data analysis, presented in this section, illustrate this point.
Excise taxes are generally imposed on either a per-unit basis, which means the tax rate is applied
per individual unit produced, purchased, or sold, or an ad valorem basis, which means the tax rate
is applied as a percentage of the product’s value. One concern with per-unit excise taxes is that
they are often set in statute at specific levels, so the inflation-adjusted value, or real value, often
falls over time.23 This trend usually continues absent legislative action to increase the statutory
rates to reflect the effects of inflation.24 As Figure 1 shows, federal excise tax collections have
generally increased each year in nominal (unadjusted) terms. However, when considering
inflation, federal excise tax revenues have been much more volatile, increasing over time but not
necessarily each year.
Figure 1. Federal Excise Tax Collections, FY1940 to FY2020
Billions of nominal or constant (FY2020) dollars

Source: Figure created by CRS using data from Office of Management and Budget, Historical Tables 2.1 and
10.1, at https://www.whitehouse.gov/omb/historical-tables/.

23 Because these calculations control for changes in the price level, economists generally compare dollar-denominated
amounts over time in real terms, not nominal.
24 For particular federal trust funds that are financed through excise taxes, the decline in the value of excise tax revenue
may be a concern. If the growth in spending exceeds revenue, then the trust fund could be depleted over time.
Congressional Research Service

5

link to page 9 link to page 10 link to page 10

Federal Excise Taxes: Background and General Analysis

Notes: Data labels shown on both lines for FY1940 and FY2020. The Constant (FY2020) Dol ars line
additionally shows a data label for FY2015.
Although nominal excise tax collections have increased from $2.0 billion in FY1940 to $86.8
billion in FY2020, real excise tax revenue has increased by much less. The brief spike in excise
tax collection during the early 1980s was largely due to the enactment of the excise tax on
windfall profits in the oil industry, which was phased out by 1993.25 The highest amount of
inflation-adjusted revenue raised by federal excise taxes since 1940 was in FY2015, when those
taxes raised $106.6 billion in 2020 dollars. Federal excise tax receipts have fallen since then.
Federal excise tax receipts as a share of gross domestic product (GDP) are lower today than they
were in the past. As shown in Figure 2, annual excise tax receipts averaged between 2.0% and
2.5% of GDP during the Great Depression, before hitting a peak of 3.1% in FY1946. After the
end of World War II, federal excise tax receipts declined as a share of GDP—particularly after the
mid-1960s. After a brief spike in the early 1980s, largely due to the enactment of the oil industry
windfall profits tax, excise tax revenue as a share of GDP trended back below 1.0% by the end of
the 1980s. In FY2020, federal excise tax receipts were 0.4% of GDP.
Figure 2. Federal Excise Tax Receipts as a Share of Gross Domestic Product (GDP),
FY1940 to FY2020

Source: Figure created by CRS using data from Office of Management and Budget, Historical Table 2.3, at
https://www.whitehouse.gov/omb/historical-tables/.
Notes: Data labels are shown for FY1940, FY1946, and FY2020.
Federal excise taxes have also declined as a share of all federal tax receipts. As shown in Figure
3, federal excise taxes comprised 30.2% of all federal tax receipts in FY1940. By the early 1950s,
the share of federal tax receipts from excise taxes began a slow decline below 15% to its current
share of 2.5% in FY2020.
The declining share of federal tax receipts collected from excise taxes corresponded with an
increase in the role of other sources of tax receipts, notably the individual income and payroll
taxes. In FY1940, individual income taxes amounted to 13.6% of all federal tax receipts and

25 Crude Oil Windfall Profit Tax Act of 1980 (P.L. 96-223).
Congressional Research Service

6

link to page 11

Federal Excise Taxes: Background and General Analysis

applied primarily to a narrow tax base.26 During World War II, the individual tax code supplanted
excise taxes as being the primary source of federal revenue, as income taxes accounted for 45.0%
of all tax receipts in FY1944 (compared with 10.9% from excise taxes).27 Receipts from payroll
taxes,28 which fund various social insurance programs, have also increased over time and are now
a significant portion of federal receipts. In FY2020, individual income taxes comprised 47.0%
and payroll taxes 38.3% of federal tax receipts, compared with 2.5% from federal excise taxes.29
Figure 3. Federal Excise Taxes as a Share of Federal Revenues, FY1940 to FY2020

Source: Figure created by CRS using data from Office of Management and Budget, Historical Table 2.2, at
https://www.whitehouse.gov/omb/historical-tables/.
Notes: Data labels are shown for FY1940 and FY2020.
Revenue by Major Types of Excise Taxes
Federal excise taxes cover a broad range of economic activity, as shown by Figure 4. The largest
set of taxes relates to surface transportation, accounting for 45% of total excise tax revenue in
FY2020. These excise taxes are dedicated for the Highway Trust Fund, including the gasoline and
diesel motor fuel taxes, a sales tax on heavy vehicles, and an annual heavy vehicle use tax. The
next largest source of federal excise tax revenues, accounting for 16% of the total, is the tax on

26 Office of Management and Budget, Historical Tables, Table 2.2, at https://www.whitehouse.gov/omb/historical-
tables/.
27 The rise in income tax receipts during World War II was largely due to the enactment of the “Victory Tax” under the
Revenue Act of 1942 (P.L. 77-753). The Victory Tax was a flat 5% tax (lowered to 3% in 1943) on net income over
$624, with few deductions. The Individual Income Tax Act of 1944 (P.L. 78-315) repealed the Victory Tax but also
raised the marginal tax rates set in statute under the individual income tax code. For more information, see Roy G.
Blakey and Gladys C. Blakey, “The Federal Revenue Act of 1942,” American Political Science Review, vol. 36, no. 6
(December 1942), pp. 1069-1082; Roy G. Blakey and Gladys C. Blakey, “Federal Revenue Legislation, 1943-1944,”
American Political Science Review, vol. 38, no. 2 (April 1944), pp. 325-330; and Paul G. Kauper, “Significant
Developments in the Law of Federal Taxation, 1941-1947: I,” Michigan Law Review, vol. 45, no. 6 (April 1947), pp.
659-678.
28 The largest payroll taxes, by revenue, are the Social Security and hospital insurance (Medicare Part A) taxes.
29 Office of Management and Budget, Historical Tables, Table 2.2, at https://www.whitehouse.gov/omb/historical-
tables/.
Congressional Research Service

7

link to page 22 link to page 12

Federal Excise Taxes: Background and General Analysis

health insurance providers created by the Affordable Care Act (P.L. 111-148 and P.L. 111-152, as
amended). This tax was fully repealed in the Further Consolidated Appropriations Act, 2020 (P.L.
116-94). Federal excise taxes on tobacco and alcohol accounted for an additional 13% and 10%
of revenues, respectively. Airport and airway excise taxes were 10% of federal excise tax receipts
in FY2020 and are dedicated to the Airport and Airway Trust Fund. These taxes include taxes on
air passenger tickets and air cargo fares, as well as aviation fuels. The remaining 6% of revenues
come from a wide variety of other federal excise taxes, such as the taxes on firearms and
ammunition and the net investment income of private foundations. For more detail about each
federal excise tax, see the CRS resources listed in the Appendix.
Figure 4. Federal Excise Tax Revenue by Major Type, FY2020

Source: Figure created by CRS using data from Office of Management and Budget, Historical Table 2.4, at
https://www.whitehouse.gov/omb/historical-tables/.
Notes: Excludes categories with negative receipts (meaning refunds exceed receipts).
Dedicated Excise Tax Revenue
One of the most important changes in federal excise tax policy over the past several decades has
been the increasing dedication of specific excise tax revenues to various trust funds and
programs. The first dedicated federal excise tax revenues were collected in FY1957. The Federal-
Aid Highway Act of 1956 (P.L. 84-627) increased the already-existing federal gasoline tax and
dedicated revenues from the tax to the newly created Highway Trust Fund. Since then, Congress
has created new and expanded existing excise taxes that are dedicated for trust funds.
In contrast, excise taxes for general revenue have largely stagnated. In recent years, the medical
devices excise tax and the health insurance industry fee were both permanently repealed. Recent
cuts to the alcohol excise tax were made permanent. Another general fund excise tax—the tax on
local telephone, typewriter, and local-service only prepaid phone cards—has been shrinking as its
taxable base has largely vanished.
The portion of federal excise tax revenue dedicated for trust funds rapidly increased from the late
1950s to about 2000, as shown by Figure 5. Since then, the exact share has varied slightly but has
consistently been above 60%. In FY2020, 66% of federal excise tax revenue was dedicated for
trust funds.
Congressional Research Service

8

link to page 22

Federal Excise Taxes: Background and General Analysis

The trust funds that receive revenue from excise taxes support a variety of federal programs. The
largest, by far, is the Highway Trust Fund, which provides federal funding for highways and mass
transit.30 The next largest is the Airport and Airway Trust Fund, which helps fund the Federal
Aviation Administration’s operations and investments in airports and related facilities.31 For more
on these trust funds and others funded by federal excise taxes, see the resources listed in the
Appendix.
Figure 5. Share of Federal Excise Tax Revenue Dedicated to Trust Funds, FY1940 to
FY2020

Source: Figure created by CRS using data from Office of Management and Budget, Historical Table 2.4, at
https://www.whitehouse.gov/omb/historical-tables/.
Notes: Data labels are shown for FY1940, FY1956, FY2007, and FY2020.
Interactions with State and Local Excise Taxes
Every state and many localities levy excise taxes. Some of the most popular goods to tax are the
same as with the federal government: every state and Washington, DC, levies excise taxes on
gasoline, alcohol, and tobacco.32 For most states, like the federal government, excise taxes
comprise a relatively small portion of total tax revenue. Across all states, excise taxes on motor
fuels, alcoholic beverages, and tobacco products comprised an average of 7% of state tax revenue
in 2019.33

30 Joseph Kile, “Testimony on Addressing the Long-Term Solvency of the Highway Trust Fund,” Congressional
Budget Office, April 14, 2021, at https://www.cbo.gov/publication/57138.
31 Federal Aviation Administration, “Airport & Airway Trust Fund (AATF),” at https://www.faa.gov/about/budget/aatf/
32 For more information on state gasoline taxes, see National Conference of State Legislatures, “Variable Rate Gas
Taxes,” July 14, 2021, at https://www.ncsl.org/research/transportation/variable-rate-gas-taxes.aspx. For more
information on alcohol and tobacco taxes, see The Pew Charitable Trusts, “Are Sin Taxes Healthy for State Budgets?”
July 2018, at https://www.pewtrusts.org/en/research-and-analysis/reports/2018/07/19/are-sin-taxes-healthy-for-state-
budgets.
33 U.S. Census Bureau, “2019 Annual Survey of State and Local Government Finances,” at https://www.census.gov/
programs-surveys/gov-finances.html. State governments have other sources of excise tax revenue besides these three.
Congressional Research Service

9

link to page 18 Federal Excise Taxes: Background and General Analysis

Changes in the consumption of a taxed good depend, in part, on the interaction of federal, state,
and local excise taxes levied on that good. Economists would predict that the relative changes in
quantities of a good consumed given a federal tax change would differ based on state and local
taxes on that good. Likewise, federal revenues may change, even if the federal tax rate does not
change, if states and localities change how they tax certain goods.
Unlike the federal government, several states automatically adjust their gas taxes for inflation
each year.34 This potentially provides more consistent revenue across years. Many states, like the
federal government, set their alcohol and tobacco tax rates in statute. Some states that do not
regularly increase these rates—especially for tobacco, with generally falling consumption—have
been experiencing falling collections from these taxes.35
Administration
All forms of excise tax use some sort of physical control or measurement by tax authorities to
determine tax liability and ensure compliance with the law.36 This section of the report describes
the different ways that excise taxes are structured, and the advantages and disadvantages of each
model.
Setting the Tax Rate
For excise taxes intended to compensate for the social costs of certain activities, economic theory
suggests that the excise tax rate should be set at a level that offsets the negative costs of that
consumption to society.37
In general, an excise tax rate can be applied in one of two ways:
 Per unit, where the tax rate is applied per individual unit produced, purchased, or
sold. For example, different per-unit rates are levied on tobacco products based
on the product type: 1,000 units of cigarettes or one pound of pipe tobacco.
 Ad valorem, where the tax rate is applied as a percentage of the value of the
product, based on the manufacturer’s wholesale or retail price. For example, the
excise tax on firearms and ammunition is set at 10% of the sale price for pistols
and revolvers and 11% for other firearms as well as shells and cartridges.38
Economists generally prefer per-unit excise taxes when marginal consumption of the targeted
commodity is deleterious. For example, cigarette taxes are levied per unit sold because the
alleged spillover effects of smoking (e.g., second-hand smoking) occur with every cigarette
smoked. The excise tax on gasoline is levied per gallon of gasoline sold because the amount of

34 National Conference of State Legislatures, “Variable Rate Gas Taxes,” July 14, 2021, at https://www.ncsl.org/
research/transportation/variable-rate-gas-taxes.aspx.
35 The Pew Charitable Trusts, “Are Sin Taxes Healthy for State Budgets?” July 2018, at https://www.pewtrusts.org/en/
research-and-analysis/reports/2018/07/19/are-sin-taxes-healthy-for-state-budgets.
36 Sijbren Cnossen, Excise Systems: A Global Study of the Selective Taxation of Goods and Services (Baltimore, MD:
Johns Hopkins University Press, 1977), p. 10.
37 If taxes are used this way to reflect the full cost of a particular type of economic activity to society, then excise taxes
can lead to a more efficient allocation of resources. This concept is discussed in more detail in the “Efficiency” section
of this report.
38 For more information on excise taxes on firearms and ammunition see CRS Report R45123, Guns, Excise Taxes,
Wildlife Restoration, and the National Firearms Act, by R. Eliot Crafton, Jane G. Gravelle, and William J. Krouse.
Congressional Research Service

10

link to page 16 Federal Excise Taxes: Background and General Analysis

gasoline consumed was (in the past) a rough approximation of how much wear and tear a driver
would impose on federally managed highways.
Per-unit taxes can invite issues with both horizontal and vertical equity, as explained below in the
section on “Equity.” Also, because per-unit taxes are often set at static rates in statute, these rates
often fall in inflation-adjusted (or real) terms.39 For example, the statutory federal excise tax rate
on distilled spirits in 1951 was set to $10.50 per proof gallon (ppg).40 The statutory tax rate was
increased from $10.50 to $12.50 ppg in 1985, and again in 1991 from $12.50 to $13.50 ppg. The
highest excise tax rate on distilled spirits still remains at the 1991 level of $13.50 ppg, or $2.14
per 750ml bottle (a “fifth”) of 80-proof liquor.41 If the 1951 tax rate was indexed for inflation, it
would be $87.71 ppg in 2020 dollars, or approximately $13.90 per 750ml bottle of 80-proof
liquor.42
In contrast, ad valorem tax rates largely avoid a real decline in value because they are applied
based on the price of a commodity or activity rather than the quantity consumed or produced. Ad
valorem rates can also be more progressive (meaning people with higher incomes pay a higher
share of their income in taxes than people with lower incomes) than per-unit rates in certain
circumstances. For example, if people with higher incomes are more likely to buy expensive
distilled spirits, then an ad valorem tax would cause them to pay more tax relative to cheaper
spirits than a per-unit tax would. However, ad valorem rates may be regressive (meaning people
with lower incomes pay a higher share of their income in taxes than people with higher incomes)
if the consumers of the commodity are not limited to those at the upper end of the income
distribution.
Choosing the Stage of Production to Levy the Tax
An excise tax can be levied at different stages along a commodity’s production and distribution
chain:43
 Production level: Tax is collected on sales by producers to wholesalers, retailers,
or other producers. Transactions prior to the sale by the last producer are often
partially exempted or taxed at reduced rates.
 Manufacturing level: Tax is collected on sales by manufacturers to wholesalers
or retailers, including the occasional direct sale to consumers.
 Wholesale level: Tax is collected on sales by the last wholesaler or manufacturer
to retailers, including the occasional direct sale to consumers.

39 The decline in the real value of per-unit taxes is due, in part, to increasing real prices of the taxed commodity or
activity over time.
40 A proof gallon is a combination of alcohol content and volume. A proof gallon is the volume in gallons, multiplied
by the percentage of alcohol, multiplied by two, and divided by 100.
41 U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau, “Tax Rates,” at http://www.ttb.gov/
tax_audit/atftaxes.shtml. The 2017 tax revision (P.L. 115-97) enacted the Craft Beverage Modernization and Tax
Reform (Subpart A of Part IX), which created a three-tier system for distilled spirits starting in 2018. The $13.50 ppg
rate is only faced by the largest domestic producers (over 22,130,000 ppg annually), as well as certain importers.
42 CRS calculations based on Office of Management and Budget GDP deflator, Historical Table 10.1, at
https://www.whitehouse.gov/omb/historical-tables/.
43 Sijbren Cnossen, Excise Systems: A Global Study of the Selective Taxation of Goods and Services (Baltimore, MD:
Johns Hopkins University Press, 1977), p. 15.
Congressional Research Service

11

Federal Excise Taxes: Background and General Analysis

 Retail level: Tax is collected on sales by retailers to final consumers, including
wholesalers or manufacturers selling occasionally to consumers.
 Turnover taxes: Tax is collected on sales at all or nearly all stages; also known
as “cascade taxes” on account of their cumulative effects.
Generally, an excise tax levied at earlier stages in the production process has lower administrative
costs and fewer opportunities for tax evasion. In most situations, consumers vastly outnumber
producers. Therefore, implementing an excise tax at the level of the consumer retail outlet often
results in a duplication of bureaucratic processes compared with a tax on manufacturers. For
example, about 249 billion cigarettes were purchased across the United States in 2017, but 92%
of these cigarettes were manufactured by four companies.44 However, ad valorem taxes imposed
at the manufacturer’s level could provide an incentive for value-added options to be ordered
further down the supply chain in an attempt to minimize the tax burden. The manufacturer tax on
firearms, for instance, is levied on the assembly of a complete rifle, but any add-ons or
modification kits are not taxed.45
Taxes imposed at the manufacturing level could lead to an effective tax rate that is higher than the
statutory tax rate. This outcome occurs because some manufactured goods have a long inventory
life, and a considerable time period may elapse between when the tax is paid (when the good
leaves the manufacturer’s premises) and the date that the good is sold. In effect, the manufacturer
incurs an interest cost to borrow the money to pay the tax.46
An advantage of imposing a tax at the retail level is that it can more easily exclude certain
consumers from an excise tax’s revenue base, if desired. For example, farmers can receive an
excise tax credit for certain fuel purchased for farm use, as this activity generally has a minimal
effect on the quality of interstate highways.47 On the other hand, exemptions could diminish the
tax’s effect on its original goal. An exemption, in the form of a refund, can be implemented
through a manufacturer’s tax, although this might require additional administrative resources. In
the case of federal motor fuel taxes, this is done by the consumer filing Form 4136 (“Credit for
Federal Tax Paid on Fuels”) to claim a credit against annual income taxes.48
Transition Issues
Special rules are sometimes used to accompany the imposition of a new excise tax or increases in
any existing tax rates to prevent tax avoidance. If an excise tax is announced effective as of a
specific date in the future, then individuals might stockpile the taxed commodity. One policy to
prevent this behavior is a floor stocks tax, or an excise tax on all existing inventory as of a
particular date. The floor stocks tax is usually imposed on the date a new tax takes effect or the

44 Centers for Disease Control and Prevention, “Economic Trends in Tobacco,” at http://www.cdc.gov/tobacco/
data_statistics/fact_sheets/economics/econ_facts/.
45 For more information, see CRS Report R42992, Guns, Excise Taxes, and Wildlife Restoration, by R. Eliot Crafton
and Jane G. Gravelle.
46 Alternatively, the manufacturer could have invested the money used to pay the tax and earned a market rate of return
during the period between when it paid the tax and when the good is sold along the next step of the production chain.
47 For more information, see “Chapter 14—Fuel Excise Tax Credits and Refunds” in Internal Revenue Service,
Farmer’s Tax Guide (Publication 225), at https://www.irs.gov/publications/p225.
48 Internal Revenue Service, “About Form 4136, Credit for Federal Tax Paid on Fuels,” at https://www.irs.gov/forms-
pubs/about-form-4136.
Congressional Research Service

12

link to page 17 Federal Excise Taxes: Background and General Analysis

date after a tax-rate increase takes effect; all new inventory subject to tax that is acquired after the
new tax becomes effective is then subject to the new tax.
Reporting
Tax liability for most federal excise taxes is reported on IRS Form 720, Quarterly Federal Excise
Tax Return. This form is generally due at the end of April, July, October, and January, and reports
taxes due the preceding quarter ending March, June, September, and December, respectively.49
Most of the excise taxpayers using Form 720 must deposit the tax owed before filing the form
with the IRS. Several excise taxes trigger a requirement to file a form in addition to Form 720
(e.g., Form 6197 [Gas Guzzler Tax] and Form 6627 [Environmental Taxes]). Excise taxes on
alcohol, tobacco, firearms, and ammunition are filed with the Alcohol and Tobacco Tax and Trade
Bureau.50
Equity
Economists generally assess tax equity using two measures: vertical equity and horizontal equity.
Vertical equity holds that households with a greater ability to pay the tax (i.e., with a higher
income) should pay a greater share of their household income in taxes than households with a
lesser ability to pay the tax. A tax system is progressive if higher-income households pay a greater
share of their income in tax than lower-income households, whereas the converse is true in a
regressive tax system. Horizontal equity indicates that households with similar abilities to pay
should actually pay similar amounts in tax. For example, all households earning a particular
amount of income would pay the same amount in taxes, regardless of the income’s form, in a tax
system with perfect horizontal equity.
Note that the excise tax rate on a particular good does not reflect its effects on equity. Even if all
consumers are subject to the same tax rate of $1.00 per unit, the tax cannot be immediately
deemed as “equitable” from an economic perspective. The tax’s effects on equity will ultimately
be a function of who bears the tax’s burden.
Figure 6 shows the distribution of excise taxes paid in 2018, by average tax rates, as calculated
by the Congressional Budget Office (CBO). Average tax rates represent the share of excise taxes
paid as a share of pretax income.

49 Internal Revenue Service, “Instructions for Form 720,” at https://www.irs.gov/instructions/i720.
50 See https://www.ttb.gov/forms on the Alcohol and Tobacco Tax and Trade Bureau website for forms.
Congressional Research Service

13

Federal Excise Taxes: Background and General Analysis

Figure 6. Average Federal Excise Tax Rate by Income Group, 2018
Federal excise taxes as a share of household income before taxes and transfers

Source: Figure created by CRS using data from Congressional Budget Office, The Distribution of Household
Income, 2018, (published August 4, 2021), at https://www.cbo.gov/publication/57061.
Notes: Income groups are created by ranking households by income before taxes and transfers after adjusting
for household size. Income includes labor, business, capital, retirement, and other sources of income, as well as
the employer portion of payrol taxes. It also includes social insurance benefits, such as Social Security, Medicare,
unemployment insurance, and worker’s compensation benefits.

With regard to vertical equity, excise taxes tend to be regressive. The lowest income quintile of
taxpayers paid, on average, 2.0% of their income on excise taxes in 2018, whereas the highest
quintile of taxpayers paid 0.4% of their income in excise taxes.
The distribution burden of individual excise taxes varies considerably. For example, tobacco taxes
are considered to be more regressive because smoking is most common among people with lower
income.51 The federal excise tax on air passenger tickets is less regressive because people with
higher incomes are more likely to fly.52
A luxury tax may be less regressive than other forms of excise taxes, but it could be difficult to
isolate the burden of such a tax to upper-income households. Middle-income consumers might
purchase goods classified as luxuries, such as jewelry or watches. The definition of “luxury” also
changes over time. For example, a federal excise tax on telephone calls was first introduced in
1892 as a luxury tax to help finance the Spanish-American War. After several instances of repeal
and reauthorization throughout the early 20th century, the tax remained part of the permanent tax

51 Centers for Disease Control and Prevention, “Cigarette Smoking and Tobacco Use Among People of Low
Socioeconomic Status,” 2019, at https://www.cdc.gov/tobacco/disparities/low-ses/index.htm.
52 Airlines for America, “Air Travel More Accessible in 2017, According to Latest Air Travelers in America Report,”
2018, at https://www.airlines.org/news/air-travel-more-accessible-in-2017-according-to-latest-air-travelers-in-america-
report/.
Congressional Research Service

14

Federal Excise Taxes: Background and General Analysis

code from 1947 until 2006.53 Although one could make the argument in 1892 that telephone calls
were luxury services, this was certainly not the case by the latter half of the 20th century.
With regard to horizontal equity, excise taxes have different effects on households with the same
level of income. Households that consume the taxed good pay a larger share of taxes out of their
current income than households that do not consume the taxed good. Excise taxes can also create
horizontal inequities across consumers of a taxed product if unequal tax rates are applied to
various forms of that product (e.g., beer vs. wine vs. distilled spirits).
Efficiency
Some excise taxes are intended to affect consumer choices. As such, they reduce economic
efficiency by distorting what economists characterize as economically optimal consumer
behavior. This distortion could be justified, in economic terms, if there is some sort of market
failure whereby the consumer’s price does not capture the effect of spillover effects to society that
result from consumption of the good or service. Individual consumption of certain goods and
services might have negative spillover effects, or externalities, on society. For excise taxes that
are intended to compensate for the social costs of certain types of consumption (such as the
airplane passenger “September 11 Security Fee,” which offsets some costs of Transportation
Security Administration security measures), economic theory suggests that the excise tax rate
should be set at a level that offsets the negative costs of that consumption to society. If taxes are
used this way to reflect the full cost of a particular type of economic activity to society, then
excise taxes can lead to a more efficient allocation of resources.
General Behavioral Effects
All types of excise tax have some similar economic effects in a competitive industry.54 In the
short run, an excise tax increases the price of the taxed product (by some fraction of the tax
amount), and the tax burden is shared by producers and consumers. Next, the quantity of the
product demanded is reduced. Lastly, the price received by producers for the product is also
reduced (i.e., producers receive less for the product posttax compared with pretax).
The exact effect depends on the responsiveness, or elasticities, of demand and supply for the
product (i.e., the percentage change in quantity demanded or supplied, respectively, divided by
the percentage change in price). The increase in retail price resulting from the tax will be greater
as the elasticity of supply increases and the elasticity of demand falls. The effect on quantity will
be greater as both the elasticity of demand and the elasticity of supply increase.

53 The federal tax on telephone calls was imposed temporarily from 1892 to 1902 to raise revenue to help finance the
Spanish-American War. The telephone tax was temporarily imposed again from 1917 to 1924 to help finance U.S.
efforts in World War I. The tax was reintroduced temporarily in 1932 to finance the government during the recovery
from the Great Depression, and was temporarily extended until its permanent authorization from 1947 until 2006. For a
history of the telephone tax, see Joseph J. Thorndike, “The Phone Tax: Gone but Never Forgotten,” Tax Notes, June 1,
2006.
54 J. Fred Giertz, “Excise Taxes,” in Encyclopedia of Taxation and Tax Policy, ed. Joseph J. Cordes, Robert D. Ebel,
and Jane G. Gravelle, 2nd ed. (Urban Institute Press, 2000). Economists also refer to competitive markets as exhibiting
“pure competition,” where no single participant (buyer or seller) has enough power to affect the market price of a
product. In contrast, sellers in markets characterized by a single or small group of sellers with enough power to affect
prices (i.e., a monopoly or oligopoly) may be able to pass more of the cost of the tax along to consumers in the form of
higher prices.
Congressional Research Service

15

Federal Excise Taxes: Background and General Analysis

In regard to sharing the price burden, the more inelastic the demand is, the larger the share of the
tax generally borne by consumers. The more inelastic the supply is, the larger the share generally
borne by producers. In cases on either extreme, consumers could bear the full burden if demand is
completely inelastic, whereas producers could bear the full price burden if supply is completely
inelastic. Put differently, an excise tax on a product with a relatively inelastic demand will have
less of an effect on consumption.55
Luxury Taxes
Luxury taxes are usually levied to increase progressivity in the tax system or to increase revenue,
not on the basis of improving economic efficiency.
A common case study cited in the analysis of luxury taxes discusses the luxury boat industry
during the early 1990s. Opponents of the luxury tax argued that the yacht industry experienced
drastic reductions in sales following the enactment of a 10% ad valorem luxury tax in the
Omnibus Budget Reconciliation Act of 1990 (OBRA90). According to this logic, the imposition
of the excise tax was largely to blame for the decline in sales and rise in unemployment in the
industry. However, economic analysis indicates that yacht sales were beginning to decline from
their peak in 1988 (before the tax), and that sales of yachts were more sensitive to changes in
personal disposable income and corporate profits after tax rather than price changes due to the
tax.56 In any case, the tax was repealed in the Omnibus Budget Reconciliation Act of 1993 (P.L.
103-66).
Sumptuary Taxes
Sumptuary, or sin, tax increases are often based on market failures, relating to externalized costs
of individual behavior associated with public health, public safety, and additional financial
burdens placed on publically financed health services.57 In short, studies measuring the respective
size of the externalities for alcohol and tobacco involve complicated technical calculations of
lifetime external costs and savings associated with alcohol and tobacco consumption that are
often subject to controversy and methodological scrutiny. An advanced review of this literature is
beyond the scope of this report. Still, studies suggest that the current per-unit tax rates on
cigarettes exceed the magnitude of the estimated net externalities, whereas the opposite could be
true for alcohol taxes.58

55 The magnitude of the elasticity is sometimes reported and the negative sign omitted because consumer demand is
often negatively correlated with prices. The important factor is if the elasticity is less than or greater than 1. Consumer
goods with an elasticity greater than 1 are considered price elastic; less than 1, price inelastic. The elasticity of demand
is not necessarily constant along all price points. Economic theory indicates that consumer demand is relatively more
inelastic in the short run and with larger changes in price than with smaller changes in price. In the long run, however,
elasticity of demand for a product is relatively elastic as consumers adjust their behavior to changes in prices.
56 This analysis is contained in out-of-print CRS Report 92-149, The Effect of the Luxury Excise Tax on the Sale of
Luxury Boats, by Dennis Zimmerman. This 1992 report is available to congressional clients upon request from the
author of this report.
57 With regard to correcting for negative externalities, regulation can also serve as an alternative (or complementary)
policy to taxation.
58 For the most comprehensive summary of this analysis, see archived CRS Report 94-214, Cigarette Taxes to Fund
Health Care Reform: An Economic Analysis, particularly pp. 3-6. The analysis in this CRS report is largely based on
the findings of a study commissioned by the RAND Corporation. See Willard G. Manning et al., The Costs of Poor
Health Habits (Cambridge, MA: Harvard University Press, 1991). For additional information, see Congressional
Budget Office, Federal Taxation of Tobacco, Alcoholic Beverages, and Motor Fuels, August 1990, p. 47, at
http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/79xx/doc7951/90-cbo-039.pdf. These studies were conducted
Congressional Research Service

16

Federal Excise Taxes: Background and General Analysis

Behavioral responses to sumptuary taxes vary by consumption good. Demand for beer is not
particularly responsive to changes in price (e.g., demand is inelastic). Meta-analyses tend to find
the demand for beer is more inelastic (i.e., less responsive) to changes in price than demand for
either wine or distilled spirits. However, studies diverge on the question of whether demand for
wine is more or less elastic than distilled spirits.59 In comparison, CBO estimates the price
elasticity of demand for cigarettes to be between 0.3 and 0.7, and that the average elasticity of the
number of smokers is 0.3. In other words, a 1% increase in the price of cigarettes results in
between a 0.3% and a 0.7% decrease in demand and roughly a 0.3% decrease in the number of
smokers.60
Compared with a sumptuary tax on a product that is relatively elastic, a tax on a product that is
relatively inelastic often results in a higher tax burden on lower-income households (due to the
regressive nature of the tax) with a smaller degree of change in consumption.
Benefit-Based Taxes
If properly structured, benefit-based taxes may enhance economic efficiency by reducing the
difference between private and social costs. Economic inefficiency often arises because private
markets tend to overproduce economic activities that lead to negative social externalities and
under produce economic activities that lead to positive externalities, absent government
intervention. Economic theory suggests that government intervention can better incorporate social
costs into the prices perceived by any one individual. However, it is often difficult to derive the
“correct” tax rate that precisely accounts for the marginal social effects of an economic activity.61
Benefit-based taxes can affect consumer demand for public goods if the link between the tax and
the use of the public good is clearly apparent. A lack of a direct link between the tax and the use
of the public good could lead to declining revenues available for upkeep and maintenance of the
public good. For example, one could argue that the purchase of gasoline does not necessarily lead
to wear and tear on federal highways; some of this fuel could be used by drivers who only
commute along local roads. Thus, many benefit-based taxes are levied on rough proxies that
affect forms of consumption unrelated to the ultimate policy goal.
An alternative policy could include more direct forms of benefit-based taxation, but there could
be a trade-off between the targeting precision of a tax and its administrative costs. For example,
although a retail tax on gasoline sales might be an imperfect proxy for highway usage, it is less
complicated than administering an excise tax based on the weight and mileage of every motor

before further increases in federal, state, and local excise taxes on cigarettes and the 1998 settlements between the
major tobacco companies and the states and territories.
59 For two examples of studies that indicate that distilled spirits are more elastic than wine, see James Fogarty, “The
Demand for Beer, Wine and Spirits: A Survey of the Literature,” Journal of Economic Surveys, vol. 24, no. 3 (2010),
pp. 428-478; and Alexander C. Wagenaar, Matthew J. Salois, and Kelli A. Komro, “Effects of Beverage Alcohol Price
and Tax Levels on Drinking: A Meta-Analysis of 1003 Estimates from 112 Studies,” Addiction, vol. 104, no. 2 (2009),
pp. 179-190. For an example of a study that indicates that wine is more elastic than distilled spirits, see Craig A. Gallet,
“The Demand for Alcohol: A Meta-Analysis of Elasticities,” The Australian Journal of Agricultural and Resource
Economics, vol. 51, no. 2 (June 2007), pp. 121-135; and Congressional Budget Office, Federal Taxation of Tobacco,
Alcoholic Beverages, and Motor Fuels, August 1990, p. 72, at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/
79xx/doc7951/90-cbo-039.pdf.
60 Congressional Budget Office, Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget, June
2012, p. vi, at http://www.cbo.gov/publication/43319.
61 For more discussion of these issues, see Harvey S. Rosen, Public Finance, 7th ed. (New York, NY: McGraw-Hill,
2005), p. 93.
Congressional Research Service

17

Federal Excise Taxes: Background and General Analysis

vehicle using a federal highway. The costs of the latter form of tax administration might exceed
the benefits.
Regulatory and Environmental Taxes
Much like benefit-based taxes, regulatory and environmental taxes are typically imposed on
economic activities that generate externalities.62 Whereas benefit-based taxes are concerned with
an underproduction of some positive externality (e.g., a public good), regulatory and
environmental taxes are usually concerned with the overproduction of some negative externality
(e.g., pollution). These negative externalities could include losses from damage to plants and
animals and to their habitats, rapid deterioration to physical infrastructure, and various harmful
effects on human health and mortality. Economic theory indicates that a tax on the marginal
production of these negative externalities could be used as a disincentive for harmful production
processes and as a means of compensating society for the cleanup and mitigation of those
externalities.
In the choice between a tax on pollution (or the regulation of some other activity with negative
spillover effects on society) and a total ban on its production, economists generally prefer a tax.63
From an economic perspective, a society’s optimum level of pollution is usually not zero; instead,
economists look to minimize total costs. For waste disposal, these costs could include residual
waste or by-product recycling, input switching to safer materials, production modification, or
other technology adoption. Marginal waste disposal pollution costs generally increase with
increased waste disposal activities as greater investment in more advanced (and more costly)
cleanup technologies and mitigation strategies becomes necessary. Put differently, there may be a
point where the cost of eliminating a particular unit of pollution may exceed the benefit. The tax
increases the private cost of pollution to reduce the difference between private and social costs.
To achieve optimum economic efficiency, the excise tax rate should be set at a level so that the
marginal, private cost of pollution is equal to the marginal, social benefits of production.
Economic theory suggests that the tax should be imposed directly upon the activity which gives
rise to the negative externality.64 The statutory incidence (or burden) of the tax may differ from
the economic incidence, because the latter is affected by elasticities. Thus, consumers may bear
some or all of the tax through higher prices.65

62 For more background on environmental taxes, see Maureen L. Cropper and Wallace E. Oates, “Environmental
Economics: A Survey,” Journal of Economic Literature, vol. 30, no. 2 (June 1992), pp. 675-740.
63 In theory, negative environmental and regulatory externalities could be mitigated with policies other than a tax, such
as production quotas or tradable permits. Each policy option has its own advantages and disadvantages, particularly
with regard to setting the price of the tax or permit or the level of the quota. For a more in-depth comparison of these
policies, see A. Lans Bovenberg and Lawrence H. Goulder, Environmental Taxation and Regulation, National Bureau
of Economic Research, NBER Working Paper 8458, September 2001, at http://www.nber.org/papers/w8458.pdf; and
Don Fullerton, Andrew Leicester, and Stephen Smith, Environmental Taxes, National Bureau of Economic Research,
NBER Working Paper 14197, July 2008, at http://www.nber.org/papers/w14197.pdf.
64 For more information, see Thomas A. Barthold, “Issues in the Design of Environmental Excise Taxes,” The Journal
of Economic Perspectives, vol. 8, no. 1 (Winter 1994), pp. 133-151.
65 A more elastic demand (supply) indicates that consumers (producers) are more responsive to changes in price.
Consumers absorb a larger share of the tax when producer supply is more elastic than consumer demand.
Congressional Research Service

18

Federal Excise Taxes: Background and General Analysis

Appendix. Select CRS Resources on Excise Taxes

Affordable Care Act Taxes
* CRS In Focus IF10591, Taxes and Fees Enacted as Part of the Affordable Care Act, by Sean Lowry
CRS Report R44159, The Excise Tax on High-Cost Employer-Sponsored Health Insurance: Estimated Economic and
Market Effects, by Jane G. Gravelle
CRS Report R43342, The Medical Device Excise Tax: Economic Analysis, by Jane G. Gravelle and Sean Lowry
Alcohol
* CRS Report R43350, Alcohol Excise Taxes: Current Law and Economic Analysis, by Sean Lowry
CRS In Focus IF10973, Craft Alcoholic Beverage Industry: Overview and Regulation, by Renée Johnson and Anthony A.
Cil uffo
Aviation
CRS Report R44749, The Airport and Airway Trust Fund (AATF): An Overview, by Rachel Y. Tang and Bart Elias
Carbon Tax
CRS Report R45625, Attaching a Price to Greenhouse Gas Emissions with a Carbon Tax or Emissions Fee: Considerations
and Potential Impacts, by Jonathan L. Ramseur and Jane A. Leggett
Coal
CRS Report R45261, The Black Lung Program, the Black Lung Disability Trust Fund, and the Excise Tax on Coal:
Background and Policy Options, by Scott D. Szymendera and Mol y F. Sherlock
Gasoline and Diesel
* CRS Report RL30304, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative
History, by Sean Lowry
CRS Report R40808, The Role of Federal Gasoline Excise Taxes in Public Policy, by Robert Pirog
Guns and Ammunition
CRS Report R45123, Guns, Excise Taxes, Wildlife Restoration, and the National Firearms Act, by R. Eliot Crafton, Jane
G. Gravelle, and Wil iam J. Krouse
Marijuana
CRS Report R43785, Federal Proposals to Tax Marijuana: An Economic Analysis, by Jane G. Gravelle and Sean Lowry
Oil Industry
CRS In Focus IF11160, The Oil Spill Liability Trust Fund Tax: Background and Reauthorization Issues in the 116th
Congress, by Jonathan L. Ramseur
Sea Commerce, Harbor Maintenance, Boating, and Inland Waterways
CRS In Focus IF11645, Distribution of Harbor Maintenance Trust Fund Expenditures, by John Frittelli and Nicole T.
Carter
* CRS Report RS22060, The Sport Fish Restoration and Boating Trust Fund, by Harold F. Upton and M. Lynne Corn
Tobacco
* CRS Report RS22681, The Cigarette Tax Increase to Finance SCHIP, by Jane G. Gravelle
CRS In Focus IF11941, Proposed Tobacco Excise Tax Changes in H.R. 5376, the Reconciliation Bill, by Anthony A.
Cil uffo
Congressional Research Service

19

Federal Excise Taxes: Background and General Analysis

Source: https://www.crs.gov/.
Notes: Archived reports are denoted with an [*]. Archived reports are available on the CRS webpage, but may
not contain the most recent data on a particular tax. Authors of some archived reports may no longer be with
CRS.

Author Information

Anthony A. Cilluffo

Analyst in Public Finance

Acknowledgments
Sean Lowry, former CRS Analyst, authored an earlier version of this report.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
shared staff to congressional committees and Members of Congress. It operates solely at the behest of and
under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
subject to copyright protection in the United States. Any CRS Report may be reproduced and distributed in
its entirety without permission from CRS. However, as a CRS Report may include copyrighted images or
material from a third party, you may need to obtain the permission of the copyright holder if you wish to
copy or otherwise use copyrighted material.

Congressional Research Service
R46938 · VERSION 1 · NEW
20

Download PDF

Download EPUB

Revision History

Oct. 15, 2021

HTML · PDF

Metadata

Topic areas

Economic Policy

Report Type: CRS Report

Source: CRSReports.Congress.gov

Raw Metadata: JSON