Sales taxes and excise taxes are similar, but there are some key differences. Unlike sales taxes, excise taxes only apply to specific items or services. Sales taxes generally apply to all transactions, with limited exceptions. Also, sales tax is always at the point of sale, whereas excise taxes are more often at the point of production. This is why you can see the separate sales tax total on your receipt, while excise taxes are simply factored by the seller into pricing. Excise taxes may not require a transaction.
Likewise, they may be applied as a specific amount per item rather than as a percentage of the selling price. Excise taxes may go by other names, such as selective sales taxes or differential commodity taxes. The list of items subject to federal excise taxes is not long, but covers some sizable expense categories for both businesses and consumers. The excise taxes that generate the biggest revenue at the federal level include fuel, airline tickets, tobacco, alcohol and health-related goods services.
Products and services that governments wish to discourage or limit face excise taxes. These include tobacco, alcohol, firearms and gambling.
Similarly, governments use excise taxes to help cover costs related to the taxed item. Merchants may be allowed deductions or credits on their annual income tax returns related to excise tax payments. Excise taxes can fall into one of two categories: ad valorem and specific.
Ad valorem excise taxes are fixed percentage rates assessed on particular goods or services. Specific taxes are fixed dollar amounts applied to certain purchases.
In some cases, governments levy excise taxes on goods that have a high social cost, such as cigarettes and alcohol, and for this reason, these taxes are sometimes called sin taxes. Overall, the largest revenue-producing excise taxes in the U. The Internal Revenue Service provides guidance on excise taxes in Publication Ad valorem is a Latin phrase that literally means "according to value.
This results in an excise tax that is based on the value of the product or service. Specific excise taxes are a set tax or fee added to a certain product on a per-unit basis. Often sin taxes on targeted goods like beer and alcohol will be taxed at the federal level and also taxed heavily by the state, making the cost of these items higher.
These taxes have a considerable impact on the consumer. Excise taxes are also charged on some retirement account activities. Many people are familiar with these taxes as penalties.
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Because excise taxes disproportionately burden low-income people, lawmakers should use excise taxes properly. Excise taxes can be used to price an externality or discourage consumption of a product that imposes costs on others.
They can also be employed as a user fee to generate revenue from people who use particular government services, revenue which should be used to maintain that government service. When a consumer buys a product, they do not necessarily consider how using that product might impact others.
An excise tax can function as a method to recoup some of the cost of this externality, as the revenue can fund increased Medicare or Medicaid costs. In this way, an excise tax can more accurately price a product to reflect the costs that its use imposes on society.
The role of excise taxes as a user fee is best understood in the context of a gas tax. The more you drive, the more you use government-funded roads. The federal gas tax acts as an estimation of how much a person is using these roads, and charges them a user fee according to the amount of gasoline they consume. While there are issues with using gas as a proxy for road use think electric cars, variances in fuel efficiency, or alternative uses for gasoline , the gas tax and other user fee excise taxes can be a noninvasive method to approximate how much a person utilizes government services and target frequent users for funding.
Excise taxes affect people differently across the income spectrum. As visualized in the graphs below, the distribution of federal excise taxes is regressive.
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