What Is an Excise Tax?
A special tax is a tax that is directed to a specific product or activity. It is not a mandatory general tax that affects a large part of the population, like an income tax. It focuses on something that perhaps only a part of the population spends money on.
You probably pay a special tax from time to time without even knowing it. Avoiding it can be difficult, at least if you don't want to give up something you need or like. The key to knowing if you are contributing to an excise tax is knowing where to look for it.
Definition and examples of a special tax
A special tax is considered a "restricted base" or an "indirect" tax because it is applied to certain goods or services, not to a specific person.
You probably paid excise duty the last time you fueled your vehicle. The federal government imposes a special tax of 18.4 cents per gallon for gasoline, which increases to 24.4 cents per gallon for diesel.
Also known as "sin taxes," excise duties are levied on products and activities that are considered unhealthy or unhealthy, including tobacco, gambling, and alcoholic beverages. The excise tax on tobacco products is about $ 1 per pack. Tanning services are taxed at 10% of the cost and the federal alcoholic beverage tax is $ 13.50 per gallon.
How does special tax work?
Excise taxes are "regressive" because they impose the greatest financial burden on families that depend on or purchase a significant number of these taxed items or services, regardless of whether or not they have income to support this tax system.
Those who earn the least pay about 1.1% of their income in excise taxes, while the richest pay only 0.3% of their income, according to the Tax Policy Center.
Some of these taxes are charged per unit, such as a flat rate per gallon of gasoline or a pack of cigarettes, but others are excise "ad valorem" taxes. They charge a percentage of what you spend instead of a flat fee. For example, you pay a special 10% tax for tanning services.
The federal government collects all of this money and deposits about 40% into its general fund. Taxes on alcohol, tobacco products, indoor tanning, and health insurance are some of the taxes that go to the general fund.
The other 60% goes to trust funds dedicated to paying for transportation, including road and airport improvements and maintenance, and medical care.
Do I have to pay a special tax?
Individuals don't pay excise taxes directly to the federal government, but those funds come out of their pockets anyway. Tax is generally included or factored into the retail price of the product or service being purchased.
Let's say you paid $ 3 for a gallon of gas. Most of that price is paid for the gas that went into the tank, say $ 2.36, but not all of it. The difference was for the "hidden" excise tax, but the tax will not be quoted or shown on your receipt like a sales tax would.
Wholesalers, importers, or manufacturers generally pay this tax to the federal government. They can pass the charge on to retailers, who in turn pass it on to consumers.
How much do excise taxes increase?
The U.S. government raised nearly $ 100 billion in various excise taxes in 2019, according to the Center for Tax Policy.
Special taxes related to transportation generated $ 40.5 billion, or 41% of the total. That money went to the Highway Trust Fund. The Airports and Airways Trust Fund received $ 16 billion of that $ 40.5 billion, or 16% of all excise taxes collected.
Taxes on tobacco use generated another $ 12.5 million, representing 13% of the total, and alcohol sales contributed $ 10 billion, or 10%.
Types of excise duties
All of these taxes are not collected solely by the US federal government - all states and some municipalities charge some type of special tax.
Boston imposes a special tax of $ 25 per $ 1,000 of value on all registered vehicles, and this amount is set by the Massachusetts Registry of Motor Vehicles. In some states, veterans, disabled people, or charities are exempt.
The main types of federal excise taxes are those on alcohol, tobacco, air travel, and motor vehicle fuel, but health-related goods and services are also subject to excise duties.
Sports betting, like the ones you can enjoy online, is also subject to federal excise taxes.
States tend to focus their excise duties on "fun" purchases rather than essentials like health care (things like alcohol, tobacco, candy, and gambling), but gasoline is also sometimes subject to excise duty.
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