Excise taxes, also known as indirect taxes, are those charged to the manufacturer on the production of items for sale with the expectation that the manufacturer will recoup the tax expense in the sales price of the item. By raising the price of the item, the manufacturer shifts the burden of the excise tax to the consumer. In addition to indirectly paying the excise tax through an increase in the price of the item for sale, the consumer must also pay sales tax. Some common excise taxes include those on gasoline, alcohol and cigarettes.
Excise taxes differ from sales tax in three important ways:
- The tax is larger than typical sales tax (sometimes accounting for as much as 50% of the sales price),
- The tax is placed on a narrow range of products,
- The tax is based on a specific measure such as so many cents per gallon rather than on a percentage.
Many of these excise taxes are charged as a deterrent for use of the product, also known as a “sin tax” for items such as alcohol. Other times the tax is used to both deter and to increase educational awareness and encourage others to not use the product. For instance, some of the excise tax from tobacco purchases is used to create public campaigns encouraging people not to smoke and sharing the health implications of smoking.
Proponents argue that excise taxes are not necessary because they are used in association with other taxes such as sales tax, and increase the tax burden on the consumer. Others argue that “sin taxes” are unnecessary; an individual should be able to determine which behavior he or she would like to engage in without having to pay an extra penalty to the government in the form of an excise tax.
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