Excise tax in the United States

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This article is about Excise in the United States. For other Excise taxes, see Excise.

Excise tax in the United States is an indirect tax on listed items. Excise taxes can be and are made by federal, state and local governments and are not uniform throughout the United States. Excise taxes are collected by the producer or retailer and not paid directly by the consumer, and as such often remain "hidden" in the price of a product or service, rather than being listed separately. This is thought to explain their appeal to many politicians.

Constitutional law[edit]

The U.S. Constitution, ratified in 1789, gave the federal government authority to tax, stating that Congress has the power to

"... lay and collect taxes, duties, imposts and excises, pay the debts and provide for the common defense and general welfare of the United States."

Tariffs between states are prohibited by the U.S. Constitution and all domestically made products can be imported or shipped to another state tax free. In the U.S. constitutional law sense, an excise tax is usually an event tax (as opposed to a state of being tax).[1] A recent exception to this "state of being" principle is the "minimum essential coverage" tax under Internal Revenue Code section 5000A as enacted by the Patient Protection and Affordable Care Act (Public Law 111–148), whereby an indirect tax is imposed on the condition of not having health insurance coverage.

Federal excise taxes are also required by the U.S. Constitution (Article 1, Section 8) to be uniform throughout the United States:

"...all duties, imposts and excises shall be uniform throughout the United States."

Historical background[edit]

Excise taxes as a share of federal revenue 1950-2007.[2]

Federal excise taxes have a storied background in the United States. Responding to an urgent need for revenue following the American Revolutionary War, after the U.S. Constitution was ratified by the ninth state in 1788 the newly elected First United States Congress passed, and President George Washington, signed the Tariff Act of July 4, 1789, which authorized the collection of tariff duties (customs) on imported goods. Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first U.S. Secretary of the Treasury, Alexander Hamilton, in 1789 to tax foreign imports. Hamilton thought it was important to start the U.S. federal government out on a sound financial basis with good credit and a regular, easily collected source of income. Customs duties (tariffs) on imported goods, as set by tariff rates, were the source of about 80-95% of all federal revenue up to 1860. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive, brought in enough money to pay off the debt and pay for the relatively low cost federal government (then) and be relatively easy to collect. Tariffs met all these criteria.

In addition to tariffs, low excise taxes were imposed to provide the federal government with some additional money to pay part of its operating expenses and to help redeem at full value U.S. federal debts and the debts the states had accumulated during the American Revolutionary War.

The first federal budget was about $4.6 million and the population in the 1790 U.S. Census was about four million, so that the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional, as taxed imports listed on the tariff lists could usually be avoided by buying domestic products if desired.

Congress set low excise taxes on only a few goods, such as whiskey, rum, tobacco, snuff and refined sugar. These low excise taxes accounted for only a small percentage of the federal income (see table on U.S. Historical Taxes). Tariffs (custom duties) were initially by far the largest source of federal income. The excise tax on whiskey was so despised by western farmers who had no easy way to transport their bulky grain harvests to market without converting them into alcohol that it led to the Whiskey Rebellion, which had to be quelled by Washington calling up the militia and suppressing the rebellious farmers, all of whom were later pardoned. In the days before steamboats, canals, railroads, etc. bulky cargo could not economically be shipped far. The whiskey excise tax collected so little and was so despised that it was abolished by President Thomas Jefferson in 1802.

In the Napoleonic Wars and the War of 1812 the imports and tariff taxes in the United States plummeted and Congress in 1812 brought back the excise tax on whiskey to partially compensate for the loss of customs/tariff revenue. Within a few years customs duties brought in enough federal income to abolish again nearly all federal taxes except tariffs. When the United States public debt was finally paid off in 1834, President Andrew Jackson abolished the excise taxes and reduced the customs duties (tariffs) in half.

Excise taxes stayed essentially zero until the American Civil War brought a need for much more federal revenue. Excise taxes were reintroduced on a wider range of items and income taxes (later declared unconstitutional) were introduced.

By about 1916 the loans taken out during the Civil War were all paid off and the excise taxes were again set very low. On January 16, 1919 the 18th Amendment was passed and alcohol production, sale and transport were essentially prohibited. Taxing alcohol products would have produced almost no income, given that alcohol sales and production had gone underground. All federal excise taxes remained essentially zero for the next ten years.

During the Great Depression (1929-1939) President Franklin D. Roosevelt and Congress started reintroducing excise taxes to increase federal income which had dropped because of the much lower incomes and the resulting lower income tax collections. On December 5, 1933 the 21st Amendment was ratified and alcohol production became legal again. The healthy excise tax[13] on now-legal alcoholic beverages paid about one third of all federal taxes during the Great Depression.

Excise taxes now have become an established part of the general budget as well as the source of funds for various trusts. The U.S. has expanded the definition of items on the excise tax lists as trusts for highways, airports, vaccines, black lung, oil spills, etc. have been set up. These are financed by excise taxes on fuels, tickets, vaccines, coal, oil, etc.

Excise tax types[edit]

The effective federal excise tax rate for different household income groups (2007). The effective tax rate equals total federal excise taxes paid during the year divided by total comprehensive income, including estimated values of Medicare and health benefits, food stamps, employment taxes on employers, imputed corporate income tax, and other non-taxable items. Excise taxes are 0.7% of all federal taxes collected.[14]

Excise taxes are usually taxes on events, such as the purchase of a quantity of a particular item like gasoline, diesel fuel, liquor, wine, cigarettes, airline tickets, tires, trucks, etc. These taxes are usually included in the price of the item—not listed separately like sales taxes usually are. To minimize tax accounting complications, the excise tax is usually imposed on quantities like gallons of fuel, gallons of wine or drinking alcohol, packets of cigarettes, etc. and are usually paid initially by the manufacturer or retailer.

Excise taxes are often passed on to the consumer who eventually consumes the product. The price for which the item is eventually sold is not generally considered in calculating the amount of the excise tax. Income taxes, value added taxes (VATs), sales taxes, and transfer taxes are examples of other excise taxes but are typically not called excise taxes (in the United States) because of the different ways they are imposed. In the U.S. essentially the only taxes called excise taxes are the taxes on quantities of enumerated items (whiskey, wine, tobacco, gasoline, tires, etc.). Other taxes on certain events may technically be considered excise taxes but may or may not be collected under the name "excise tax."

An example of a state of being tax is an ad valorem property tax—which is not an excise. Customs or tariffs are based on the property (usually imported goods) as a state of being or ad valorem taxes and are also typically not called excise taxes. Excise taxes are collected by producers and retailers and paid to the Internal Revenue Service or other state and/or local government tax collection agency. Historical federal excise tax collections to 1945 are listed in the Historical Statistics of the United States[15] and more recent federal excise tax data is listed in the White House historical tables—Table 2.1[16]

For purposes of the U.S. Constitution, an excise tax can be defined as any indirect tax (usually, a tax on an event). An excise means any tax other than: (1) a property tax or ad valorem tax by reason of its ownership; (2) a tax per head tax or capitation tax by being present (very rare in the United States).

An excise is imposed on listed specific taxable events or products and is usually not collected or paid directly by the consumer. Excise taxes are collected by the producer or retailer and paid to the Internal Revenue Service, state or local tax agency. The consumer ultimately bears the economic burden of the excise tax, the amount of which is added to the price of the product when it is sold. Often sales taxes are collected as a percentage of the cost of the product and its excise tax—a tax on a tax.

Traditionally the federal government has left property taxes and sales taxes to the states and local governments for their revenue. Tariffs or customs duties on imported goods are essentially the only property taxes imposed by the U.S. federal government. Tariffs can be set only by the federal government, not by any state or local jurisdiction. For U.S. constitutional law purposes, a customs duty or tariff is nominally in a separate category from an excise tax. Excise taxes can be (and are) set by federal, state and local jurisdictions.

Many taxes are simply called an excise tax in the statute imposing that tax (an excise in the statutory law sense) even though they could more accurately be called some other kind of tax. A collection of different taxes has accumulated over the years under the excise tax classification.

Often trust funds do not collect enough taxes because of assumptions that the politicians made in setting the excise tax rates and allowable trust fund projects result in underfunding. Changing consumer purchases have made the original assumptions wrong which may also result in underfunding. Because many of the funds are allocated to repay bonds and other long term projects, they often require an infusion of general funds to stay solvent. Long term adjustments of tax rates or a less extensive list of allowable trust fund projects to keep the funds solvent require bi-partisan agreements, which are obviously rare.

The excise taxes on alcoholic beverages, tobacco products and firearms are administered under the Alcohol and Tobacco Tax and Trade Bureau (TTB) in the United States Department of the Treasury.[18] The total excise taxes on gasoline, diesel etc. for each state have been calculated.[19]

For excise taxes in each state on fuels, see Fuel taxes in the United States. For excise taxes in each state on cigarettes, see Cigarette taxes in the United States.

Federal Trust Fund excise tax collections are often remitted to each state by complicated allocation plans. The Highway Trust fund moneys are split between highways and transit systems. The Highway Account normally receives about 85% of all highway trust fund taxes, and the Mass Transit Account receives about 15% of all Highway Trust Fund excise tax collections.[20]

The Highway Trust Fund may well require tax rate adjustments to stay solvent and make up for the increased car mileage dictated by the EPA or the increased use of untaxed electric vehicles. As fuel prices increase, there is a slow decrease in gallons of fuel bought as vehicles are made more efficient and/or travel smaller distances all of which reduce Highway Trust Fund collections. Federal funding of the Highway Trust Fund is restricted for use on capital expenditures, such as construction and reconstruction of roads, bridges or tunnels, or payment of bonds sold to finance the work.

The bulk of funding is for specific programs set up to channel aid to the states for a variety of uses, such as providing capital funding for the Nation’s most heavily used roads, maintaining interstates, and fixing bridges. Regular maintenance on non-interstate roads, including pothole patching and snowplowing, must be funded through other sources. Funding often requires a partial dollar match by the states. The Mass Transit Account which gets its funding from a fraction of the excise taxes imposed on fuels, etc. has similar restrictions.

Statutory law[edit]

The term "excise" also has a statutory law meaning. Generally, in the United States any statute that imposes a tax specifically denominated as an "excise" is an excise tax law. U.S. federal statutory excises are (or have been) imposed under Subtitle D ("miscellaneous excise taxes") and Subtitle E ("Alcohol, Tobacco, and Certain Other Excise Taxes") of the Internal Revenue Code, 26 U.S.C. § 4001 through 26 U.S.C. § 5891, relating to such things as luxury passenger automobiles, heavy trucks and trailers, "gas guzzler" vehicles, tires, petroleum products, coal, vaccines, recreational equipment, firearms (see National Firearms Act), communications services (see Telephone federal excise tax), air transportation, policies issued by foreign insurance companies, wagering, water transportation, removal of hard mineral resources from deep seabeds, chemicals, certain imported substances, non-deductible contributions to certain employer plans, and many other subjects. The Commonwealth of Massachusetts charges what it calls an "excise tax" on all vehicles, even though this is, in fact, an ad valorem tax.

Excise duties usually have one or two purposes: to raise revenue and to discourage particular behavior or purchase of particular items. Taxes such as those on sales of fuel, alcohol and tobacco are often "justified" on both grounds. Some economists suggest that the optimal revenue raising taxes should be levied on sales of items having an inelastic demand, while behavior altering taxes should be levied where demand is elastic. Most items on the excise tax lists are relatively inelastic "addictions" with only long term elasticity.

One of the most common excises in the United States is the cigarette tax imposed by both the federal and state governments. This tax is simply an excise tax applied to each pack of cigarettes. Specifically, the federal government uniformly charges an excise tax of $1.01 for a standard pack of 20 cigarettes. On top of the federal tax, all 50 states levy a different cigarette tax that ranges from $0.17 per pack in Missouri to $4.35 per pack in New York.[22] Overall, the excise taxes constitute most of the retail cost of cigarettes. Cigarette taxes can be avoided in some jurisdictions if the consumer purchases loose tobacco and cigarette paper separately or by purchase of cigarettes from lower taxed states.

Excise taxes can be imposed and collected at the point of production or importation, or at the point of sale and then remitted to the Internal Revenue Service or state or local taxing agency. Often some excise taxes are collected by the federal government and then remitted to the states on a partially matching basis to pay for particular items like interstate highway construction, airport construction or bridge repairs. Excise taxes are usually waived or refunded on goods being exported, so as to encourage exports. Smugglers and other tax evaders will often seek to obtain items at a point at which they are not taxed or taxed much lower and then later sell or use them at a price lower than the post-tax price in their jurisdiction.

For similar items, excise duties are the same for imported and domestically produced goods; if the tax is different, then there is an explicit or implicit customs duty or tariff.

An unusual example of a state "excise" tax is found in the State of Hawaii. In lieu of a sales tax, the State of Hawaii imposes a tax called a General Excise Tax, or GET, on all business activity in the State. The GET is charged at a rate of 4% for most businesses and 0.5% for wholesalers. The tax is imposed on all business entities, so in essence, the tax is collected at every level of production (material supplier to manufacturer to wholesaler to retailer.) The GET is also charged on all business service activity such as real estate agent commissions, lawyer fees and the like. A more accurate tax term would be a value added tax or VAT.[23]

With Hawaii's industry heavily dependent on tourism and tourist spending, the state regularly raises nearly half its government revenues through the imposition of the GET.[24] Hawaii's GET has been criticized for having a disproportionate impact on low-income families because of the fact it is charged on intermediary transactions (such as those between wholesaler and retailer) as well as services, resulting in a pyramiding effect as costs rise in relation to final retail prices.[25]

Excise tax enforcement[edit]

The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), formed in 1886, is a federal law enforcement organization within the United States Department of Justice (DOJ).[26] Its responsibilities include the investigation and prevention of federal offenses involving the unlawful use, manufacture, and possession of firearms and explosives; acts of arson and bombings; and illegal manufacturing and trafficking of alcohol and tobacco products that avoid paying the federal excise taxes on these products.

The Internal Revenue Service (IRS) within the United States Department of the Treasury is responsible for collecting the over one million excise tax returns that collects almost $70 billion in excise taxes. IRS publication 510[27] lists all the forms, rates, rules etc. on federal excise tax collection. The IRS is authorized to sue people who violate the excise tax rules and have them incarcerated.

Commentary on excises[edit]

Samuel Johnson's A Dictionary of the English Language defined excise in 1755 as "A hateful tax levied upon commodities, and adjudged not by the common judges of property, but wretches hired by those to whom excise is paid."

See also[edit]

References[edit]

  1. ^ Also, see generally subsection (d), paragraph (3) of 26 U.S.C. § 7602. See also 26 U.S.C. § 2056A, subsection (b); 26 U.S.C. § 2701, subsection (d); 26 U.S.C. § 4961; 26 U.S.C. § 4962; 26 U.S.C. § 4963.
  2. ^ JCX-49-11, Joint Committee on Taxation, September 22, 2011, pp 4, 50.http://www.jct.gov/publications.html?func=startdown&id=4363
  3. ^ Historical Statistics of the United States 1789-1945; Series M-42-55; Imports (1789-1945),[1] Accessed 5 Aug 2011
  4. ^ Bicentennial Edition Historical Statistics of the United States Series {Part 2 Zip file: CT1970p2-08;} Series U 1 25; Balance of International Payments Imports 1790 1970[2] Accessed 5 Aug 2011
  5. ^ Imports 1960-2010[3] Accessed 5 Aug 2011
  6. ^ Historical Statistics of the United States 1789-1945 Series P 89-98 Excise Tax {labeled: Internal Revenue/Other} Tot. Receipts; Customs, Income taxes[4] Accessed 5 Aug 2011
  7. ^ Whitehouse Historical Tables 1940-2016; Table 1.1 Tot. Receipts (1901-2010); Table 2-1, 2-4 Excise Tax(1934-2010); Table 2-5 Customs (1940-2010)[5] Accessed 5 Aug 2011
  8. ^ Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970 {Part 2 Zip file: CT1970p2-12;} Series Y 343-351 (1940-1970) Customs, Tot. Receipts, Income taxes; Payroll taxes, Excise; Y342 339 (1940 1970) Receipts; Y-352 357(1789-1939) Government Receipts: Total(1789-1970), Customs (1789-1970), Y 358 373 Excise tax (1863-1970) Income Tax (1916-1970); Series U 1-25 Balance of International Payments Imports(1790-1970)[6] Accessed 5 Aug 2011
  9. ^ Historical Statistics of the United States Series 1790-1945[7] Accessed 5 Aug 2011
  10. ^ Bicentennial Edition Historical Statistics of the United States Series 1790-1970[8] Accessed 5 Aug 2011
  11. ^ U.S. Census Trade Statistic[9] Accessed 5 Aug 2011
  12. ^ Whitehouse Historical Tables 1940-2016[10] Accessed 5 Aug 2011
  13. ^ Excise Tax Collections [11] Accessed 8 Aug 2011
  14. ^ Congressional Budget Office, Average Federal Tax Rates in 2007, June 2010, pp. 6.http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/115xx/doc11554/averagefederaltaxrates2007.pdf
  15. ^ Historical Statistics of the United States 1789-1945 Series P 89-98 [12] Accessed 5 Jul 2011
  16. ^ White House historical tables [13] Accessed 21 Aug 2011.
  17. ^ Table 2.4—COMPOSITION OF SOCIAL INSURANCE AND RETIREMENT RECEIPTS AND OF EXCISE TAXES: 1940–2016 hist02z4[14] Accessed 28 Jul 2010
  18. ^ TTB excise taxes [15] Accessed 27 Jul 2011
  19. ^ Fuel taxes by state [16] Accessed 27 Jul 2011
  20. ^ Highway Trust allocations [17] Accessed 27 Jul 2011
  21. ^ PRESENT LAW AND BACKGROUND INFORMATION ON FEDERAL EXCISE TAXES [18] Accessed 28 Jul 2010
  22. ^ "State Cigarette Excise Taxes". Retrieved 1 July 2010. 
  23. ^ State of Hawaii Department of Taxation (December 2006). "An Introduction to the General Excise Tax" (PDF). pp. 1–2. Retrieved 2008-09-05. [dead link]
  24. ^ State of Hawaii Department of Taxation (December 4, 2007). "Annual Report: 2006-2007" (PDF). p. 41. Retrieved 2008-09-05. [dead link]
  25. ^ Kalapa, Lowell (August 18, 2008). "Hawaii Families Need Tax Relief". Hawaii Reporter. Retrieved 2008-09-05. [dead link]
  26. ^ ATF Online - Bureau of Alcohol, Tobacco and Firearms [19] Accessed 27 Jul 2011
  27. ^ IRS publication 510 Excise Taxes [20] Accessed 27 Jul 2011