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What is an Excise Tax?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 25 August 2016
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Excise taxes are taxes charged on the production and sale of particular goods. One of the most widespread examples of an excise tax is the additional taxes which many nations levy on alcohol. There are a number of reasons for a nation to mandate the payment of an excise tax, ranging from the desire to raise additional funds to the goal of penalizing people who purchase or use things which are considered harmful. Classically, excise taxes are bundled directly into the cost of an item, which can make them invisible to the consumer.

Unlike things like income taxes, which are paid by the consumer directly, excise taxes are collected by merchants and then sent to the government, much like a sales tax. Merchants are responsible for ensuring that the correct amount is collected, and for passing it on to the government in a timely fashion. It may also be necessary for merchants to receive a special permit from the government which will allow them to collect excise taxes.

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In some cases, an excise tax is charged per unit, meaning that merchants collect a flat fee per unit of the product. Other excise taxes are ad valorem taxes, charged according to the value of the item. In both cases, the merchant can opt to include the excise tax in the list price of the item, or to indicate to consumers that the sales price does not include excise and sales taxes. The presence of an excise tax can drive the cost of an item up significantly from the list price, which can be frustrating for consumers.

Excise taxes are often charged on goods which indirectly cost the government and society. Alcohol, for example, contributes to traffic accidents, which require the response of emergency services and medical personnel. Tobacco, another item commonly subjected to excise taxes, also costs the health care system a great deal of money, and some excise taxes on tobacco are also used to pay for tobacco education and cessation programs. Gasoline is another product which is often taxed, with the taxes paying for road upkeep, air quality control measures, and other costs related to gasoline consumption.

Governments have been charging excise taxes since the 1600s, and the system has become much more elaborate and comprehensive than it was when the Dutch first developed it. Governments justify excise tax programs by explaining that they generate needed funds, in addition to reminding consumers that some products are harmful and dangerous, and reducing consumption might be beneficial. Taxpayers and consumers of such products often resent excise taxes because they drive product costs up considerably.

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honeybees
Post 5
@sunshined - I had never thought about what the excise tax on my phone bill was really used for. I do understand how a fuel excise tax can be used for the improvement of roads.

Even though I understand the concept of this, it doesn't mean I like paying it. When I look at the price of a gallon of gas, I never think about how much tax I am paying for that gas. It just seems high whether the excise tax is shown in the price or not.

sunshined
Post 4
I got really frustrated at the high federal telephone excise tax every month on my phone bill. Even though the tax was only a few dollars, it seemed very high compared to the total phone bill.

We eventually got rid of our house phone, and now just have phone service through our cell phone company. There is still an excise tax on our cell phone bill, but it doesn't seem to be as high as it was with our land line.

I don't know if there is a difference or not, but the taxes we pay for our phone bill now are not as much. What does something like a federal telephone excise tax help to fund?

julies
Post 3
One thing I have always found interesting is how the excise tax on cigarettes is used to fund campaigns to stop smoking. I know it's the government who receives the excise tax, but I have also seen tobacco companies promote anti-smoking campaigns.

I don't have a problem with an excise tax on cigarettes or alcohol, but I do think the tax can be excessive. I sometimes wonder how political it can be and if the money for the tax is used properly.

I suppose these are questions I may never have answers to, but excise taxes is something I have always found a little frustrating. Nobody likes to pay more taxes than they have to, and it seems like excise taxes, like all other taxes, keep getting higher.

golf07
Post 2
I have never been a smoker, but think that the excise tax you pay for cigarettes might be a good motivating factor to quit. I don't pay that much attention to how much cigarettes cost, but when I heard how high the cigarette excise tax was on each package of cigarettes, I was surprised.

On one hand I can see how upset consumers get when there seems to be such a high excise tax on one product. From the other side I can see how it seems fair because of the high cost of medical care that often goes along with the consequences of smoking.

Personally I don't see the cigarette excise tax going away any time soon. I wouldn't be surprised if it keeps getting higher and higher.

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