Back to: ACCOUNTING & TAXATION
Excise Tax – Defined
There are many types of taxes. Some taxes are paid by consumers directly, and some are paid indirectly. Indirect taxes are not paid by consumers directly but instead it is levied by taxing authorities on businesses, merchants, and producers who pass them onto consumers by raising prices of goods and services.
An excise tax is an example of an indirect tax that is levied on goods and services such as oil, tobacco, cars, etc.
A Little More on Excise Tax
Excise duties or taxes can be levied by federal, state and even municipal governments. Excise tax can be divided into two broad categories: Specific and Ad Valorem.
- Specific taxes are the fixed amount levied on specific goods and services. The government may levy fixed-dollar-amount excise duties of certain goods and services which are not sustainable or have higher social costs, such as citrates, cigar and other alcoholic products. For example, New York State and municipal government levies specific tax on cigarettes. For instance, New York State charges $4.35 tax on each packet of cigarettes. In New York City another specific excise tax of $1.5 is levied so the total specific tax on each pack of cigarettes is $5.85.
- Ad valorem is a Latin words which generally means “according to worth or according to value.” Ad valorem taxes are the percentage of tax levied on certain goods (including equipment) and services. Ad valorem varies from product to product. For instance, the Internal Revenue Service (IRS) levies 20% excise duty on indoor tanning services. Many states charge an annual ad valorem tax based on the value of an individual’s personal vehicles.
Excise duties or taxes are sometimes referred to as penalty taxes, such as certain transactions in retirement accounts (such as early withdrawals). According to Internal Revenue Service (IRS) around $102 billion was collected in FY 2016 in excise duties collection.
References for Excise Taxes
Academic Research on Excise Taxes
- ● The property tax: An excise tax or a profits tax?, Mieszkowski, P. (1972). Journal of Public Economics, 1(1), 73-96. This paper analyses two opposing viewpoints of the concept of property tax as an excise tax.
- ● Beverage purchases from stores in Mexico under the excise tax on sugar sweetened beverages: observational study, Colchero, M. A., Popkin, B. M., Rivera, J. A., & Ng, S. W. (2016). bmj, 352, h6704. In this observational study the authors used data on the purchase of beverages in Mexico from January 2012 to December 2014 from an unbalanced panel of 6253 households providing 205 112 observations in 53 cities with more than 50 000 inhabitants. To test whether the post-tax trend in purchases was significantly different from the pretax trend, the authors used a difference in difference fixed effects model, which adjusts for both macroeconomic variables that can affect the purchase of beverages over time, and pre-existing trends.
- ● On capturing oil rents with a national excise tax, Bergstrom, T. C. (1982). The American Economic Review, 72(1), 194-201. This paper argues that since the supply of oil in the ground is inelastic, the incidence of a sales tax on oil, maintained forever at a fixed rate, would fall entirely on the oil-suppliers. The paper calculates optimal tax rates for a country as a function of these variables and estimates optimal oil tax rates for the U.S., for some OECD countries separately, and for the U.S. plus the OECD collectively.
- ● Cigarette smoking before and after an excise tax increase and an antismoking campaign–Massachusetts, 1990-1996., This paper examines the 1992 ballot petition of the residents of Massachusetts on the need for increased tax on cigarettes. It also goes on to show the reason for the introduction of the Massachusetts Tobacco Control Program (MTCP)This report summarizes the findings of the assessment and compares trends in cigarette consumption (i.e., purchases) in Massachusetts, in California (where a voter-mandated cigarette tax increase in January 1989 funded a statewide antismoking campaign that began in April 1990, and in the 48 remaining states and the District of Columbia combined.
- ● Effects of an increase in the federal excise tax on cigarettes, Sumner, D. A., & Wohlgenant, M. K. (1985). American Journal of Agricultural Economics, 67(2), 235-242. The economic impact of a cigarette tax increase on the cigarette and tobacco industries depends on market forces and on the U.S. tobacco program. This study uses a log-linear equilibrium displacement model, parameter estimates from prior studies, and recent data to indicate quantitative effects. International trade implies that the effect of the tax increase on the price of domestic tobacco will be small, even in the case of fixed tobacco quotas. However, the effects on tobacco producers’ revenue, quota lease rates, and producer economic rents can be significant, depending on the response of U.S. tobacco policy to a tax change.
- ● Tax Expenditures in the Federal Excise Tax System, Davie, B. F. (1994). Tax Expenditures in the Federal Excise Tax System. National Tax Journal, 39-62. Federal excise taxes contain tax expenditure provisions analogous to the tax expenditures imbedded in individual and corporate income taxation. These provisions generate revenue losses from exemptions or reduced tax rates for particular groups of producers or consumers of commodities and services otherwise subject to excise taxation. The 244 tax expenditure provisions identified here are deviations from the “normal structure” of nine different types of excise taxes. Theoretical issues involved in estimating resulting revenue losses are discussed, but estimates of revenue losses and studies of the efficiency of these tax expenditures in accomplishing fiscal objectives remain subjects for future research.
- ● Implementation of the federal excise tax on indoor tanning services in Illinois, Jain, N., Rademaker, A., & Robinson, J. K. (2012). Archives of dermatology, 148(1), 122-124. This paper analyses the 10% federal excise tax placed on indoor tanning services in July 2017. The article aims to answer three questions. It aims to determine if (1) whether salon owners or clients were paying the tax; (2) what factors influenced the salon owners’ decisions to pay the tax or to pass it on to clients; and (3) general attitudes regarding the tanning tax as well as opinions on legislation banning indoor tanning for all minors younger than 18 years.
- ● The effects of the 1965 federal excise tax reductions on prices, Brownlees, O., & Perry, G. L. (1967). National Tax Journal, 20(3), 235-249. This paper analyses the effects of the 1965 federal excise tax reduction. Emphasis is placed on the automotive replacement industry, and it aims to show how changes in tax impacted productions and sales.
- ● Lifetime incidence and the distributional burden of excise taxes, Poterba, J. M. (1989). Lifetime incidence and the distributional burden of excise taxes. This paper shows that household expenditures on gasoline, alcohol, and tobacco as a share of total consumption (a proxy for lifetime income) are much more equally distributed than expenditures as a share of annual income. It goes on to show that longer-horizon perspective, excise taxes on these goods are therefore much less regressive than standard analyses suggest.
- ● The potential for using excise taxes to reduce smoking, Lewit, E. M., & Coate, D. (1982). Journal of health economics, 1(2), 121-145. We examine the potential for reducing cigarette smoking through increases in cigarette excise taxes by estimating the price elasticity of demand for cigarettes. Using information on individual smoking behavior from the 1976 Health Interview Survey, we estimate the adult price elasticity of demand for cigarettes to be -0.42. Results show that an excise tax increase would discourage smoking by successive cohorts of young adults, and those reduced smoking levels would be reflected in aggregate smoking as these cohorts mature.
- ● Oligopoly structure and the incidence of cigarette excise taxes, Barnett, P. G., Keeler, T. E., & Hu, T. W. (1995). Journal of Public Economics, 57(3), 457-470. A model of oligopoly price behavior and tax incidence for the U.S. cigarette industry for the period 1955–1990 is presented. A simulation shows that an increase in the federal excise tax causes a greater increase in price, and a greater decrease in consumption, than does the same increase in the average of state and local tax rates.
- ● Issues in the design of environmental excise taxes, Barthold, T. A. (1994). Journal of Economic Perspectives, 8(1), 133-151. This paper explores economic, political, and practical issues that arise in the design of environmental taxes.
- ● A working model for predicting the consumption and revenue impacts of large increases in the US federal cigarette excise tax, Harris, J. E. (1994). (No. w4803). National Bureau of Economic Research. This report describes an easily computable model of the relation between cigarette prices and cigarette consumption in the United States. The model is used to predict the revenue impacts of Federal excise tax hikes ranging from $0.45 to $1.76 per pack.