10.5 Excise Taxes

Excise taxes are often implemented for several key reasons. One major rationale is the discouragement of consumption, particularly for products deemed harmful, such as alcohol or tobacco, which are subject to sin taxes. Another purpose is the internalization of externalities, where the tax is used to account for the social costs of certain activities, such as pollution, as seen with a gas guzzler’s tax. Excise taxes can also serve as an approximation for benefit charges, ensuring that those who use or benefit from certain goods or services pay for their associated costs. Additionally, excise taxes can help increase vertical equity by placing a heavier tax burden on luxury goods, which are typically purchased by wealthier individuals. In some cases, they allow the tax burden to be exported to non-residents, particularly with taxes levied on goods used by tourists.

There are several types of excise taxes, including selective taxes that target specific goods or services, sumptuary taxes (or sin taxes) aimed at discouraging consumption of harmful products, benefit-based taxes that are tied to specific services or benefits, and regulatory or environmental taxes designed to influence behavior in favor of better environmental or social outcomes.

Tax Policy Center: What are the major federal excise taxes, and how much money do they raise?