Excise taxes are the oldest taxes in human civilization and make up only a small fraction of government revenues in modern economies. But they remain an important issue in certain key policies including highway funding, alcohol use and health financing. So they merit some examination.
Start with a definition. An excise tax is levied on a particular product or service, historically at a specified amount of money per unit of the good, though sometimes as a percentage of value. The most important one in our country is the fuel tax imposed at federal and state levels to fund transportation infrastructure. Taxes on alcohol and tobacco also are well known. People who read their airline tickets may note a federal tax.
Some are less well known. There is 75 cent per dose tax on mandatory vaccinations for a fund to compensate those harmed by vaccinations. There is a 10 percent tax on tanning sessions. And there are taxes on firearms, ammunition and sport-fishing equipment, wagering and telephone calls.
Some of us remember when tire ads included the little note “plus FET” to cover the Federal Excise Tax based on pounds of rubber in the tire, but that now applies only to truck tires. And perfume no longer gets hit.
All states tax motor fuels, alcohol and tobacco. Some have other idiosyncratic ones. And municipalities in many states have the power to impose their own excises.
At the federal level, these bring in about $100 billion, some 3 percent of federal revenue. In 1950 they equaled 3 percent of gross domestic product, but now are less than a half of one percent. Taxes for highway and airport use are some 55 percent of the total with alcohol and tobacco bringing in another quarter. In health care, a tax on drugs, the medical device tax still in abeyance, the tax on “Cadillac plans” and the penalty that had been imposed on people without coverage brought in 16 percent of the total in 2015.
Why have these taxes? Consider that individual and corporate income taxes and FICA bring in nearly all federal revenue and sales and income taxes provide most state revenue.
The basic answer is because these taxes have always existed, going back at least to Babylonian king Hammurabi four millennia ago. Governments needed money and taxing tangible goods was the simplest way to get it. It also was clear that taxing items not made in every home yet highly needed or desired worked best. So taxes on salt are ancient and those on alcohol are nearly as old.
While it is often asserted that taxes on booze, smokes and gambling are “sin taxes,” instituted to discourage activities deemed unwholesome, the reality is that these simply are where the money is. Long before any economist used the term “inelastic demand,” governments knew that some items could be taxed without reducing their consumption much. Salt, alcohol and later tobacco were golden eggs that could be harvested without killing the goose.
In despotic regimes and in the feudal era, excise taxes were a means for economic or political elites to extract resources from the poor. However, especially starting in the Renaissance, “sumptuary taxes” on luxury goods also existed. Often these were a way the old political elite could take money from the new merchant class or from minorities such as Jews. Of course, these taxes were clothed in the rhetoric of religious piety. The old perfume tax was an example as was the tax on long-distance telephone calls.
In some cases taxes, such as those on vehicle and airplane fuels, truck tires, air cargo and passengers, are a way of implementing a “benefits received” principle of taxation. If you don’t fly, you don’t pay as much for airports and if you don’t drive, you don’t pay as much for roads.
The tax on vaccinations is intended to spread the social cost of inevitable but infrequent adverse reactions over society as a whole rather than on the families affected. The tax on coal that is earmarked for a fund to care for miners with black lung is similar. Society as a whole benefited from coal as a fuel, but underground miners bore an external cost. The tax on tanning, however, is not earmarked for skin cancer treatment and is closer to the “Pigouvian tax,” from British economist Arthur Cecil Pigou’s criteria of setting the tax equal to the external cost, so dear to economists.
But many taxes flout this model. When many people smoked, tobacco taxes were low, but now that smoking makes one a social pariah, they are very high in many states — far exceeding the compensation needed for external costs. Drinking is still socially acceptable and widespread, so alcohol taxes are well below the external cost to society of consumption. And most have not been adjusted for inflation for decades.
Especially at the state level, there are practical problems with excise taxes. When they vary between states, you get smuggling and black markets. When I was at Fort Bragg in 1968, North Carolina had no tobacco tax, so fellow troopers would load the trunk and backseat of their ’63 Impala with cigarettes at 15 cents per pack, drive up to New York on a three-day pass and come back having paid for their gas and eats with enough left over to dwarf the pay we PFCs got in a month.
When different states have different rates, alcohol taxes must be paid by producers or distributors based on what rate is due in what state. My favorite Brazilian restaurant cannot just order Xingu or “Crazy Palm” beer from back home, it has to find some importer-distributor set up to pay Minnesota taxes. Ditto for specialty brewers that want to sell other states. Such administrative costs are minor for Anheuser Busch but big for a startup.
Ditto for fuel taxes. Only truckers themselves understand all the rigmarole of having to prove they bought fuel in a high-tax state or be fined when stopped before crossing the line into a lower-tax one.
Excise taxes also are regressive, taking a bigger percentage of income of poorer households than of higher income ones. A bit of this is due to higher rates of smoking among the poor, but most is due to the simple fact that driving to work and having a few beers is a bigger fraction of total income for Joe Sixpack than for Bill Gates. With the same per unit tax on a gallon of gas or sixpack of beer, the working stiff pays proportionately more in tax than white collar folks. For the poorest fifth of the population, excise taxes take about 1.6 percent of income. For the richest five percent, it is 0.1 percent.
Relating a tax to a specific problem as for black lung or vaccinations is attractive for advocates in that it sets up a stable revenue source not subject to vagaries of annual appropriation fights. But this often means that over time, the tax rate is less relevant to the actual need. And the “excess burden,” or degree by which the overall cost to society of the tax exceeds revenue raised, tends to be high for such one-off taxes. The tanning session tax probably fails on Pigou’s criteria for offsetting externalities and also fails because of such inefficiency.
The question of “incidence,” or who actually pays the tax, is complicated and dealt with in recent columns. In most cases it is the consumer who pays the bulk. The drug and the long-delayed medical device taxes of the Affordable Care Act are bad taxes. But the bellyaching of the manufacturers that this will kill research and development is as weak as the whining of supermarkets that any increase in the minimum wage will drive them into bankruptcy. In both cases, elasticities of demand and supply are such that the cost of the tax or wage increase will be passed nearly entirely on to others.