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What is an Excise Tax?
There are many types of taxes. Some taxes are paid by consumers directly, and some are paid indirectly. Indirect taxes are not paid by consumers directly but instead it is levied by taxing authorities on businesses, merchants, and producers who pass them onto consumers by raising prices of goods and services. An excise tax is an example of an indirect tax that is levied on goods and services such as oil, tobacco, cars, etc.
How is an Excise Tax Used?
Excise duties or taxes can be levied by federal, state and even municipal governments. Excise tax can be divided into two broad categories: Specific and Ad Valorem.
- Specific taxes are the fixed amount levied on specific goods and services. The government may levy fixed-dollar-amount excise duties of certain goods and services which are not sustainable or have higher social costs, such as citrates, cigar and other alcoholic products. For example, New York State and municipal government levies specific tax on cigarettes. For instance, New York State charges $4.35 tax on each packet of cigarettes. In New York City another specific excise tax of $1.5 is levied so the total specific tax on each pack of cigarettes is $5.85.
- Ad valorem is a Latin words which generally means according to worth or according to value. Ad valorem taxes are the percentage of tax levied on certain goods (including equipment) and services. Ad valorem varies from product to product. For instance, the Internal Revenue Service (IRS) levies 20% excise duty on indoor tanning services. Many states charge an annual ad valorem tax based on the value of an individuals personal vehicles.
Excise duties or taxes are sometimes referred to as penalty taxes, such as certain transactions in retirement accounts (such as early withdrawals). According to Internal Revenue Service (IRS) around $102 billion was collected in FY 2016 in excise duties collection.