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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Briefing Book
  • Excise Taxes
  • What are the major federal excise taxes, and how much money do they raise?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

What are the major federal excise taxes, and how much money do they raise?

Excise Taxes

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Individual Taxes
Q.

What are the major federal excise taxes, and how much money do they raise?

A.

Federal excise tax revenues—collected mostly from sales of motor fuel, airline tickets, tobacco, alcohol, and health-related goods and services—totaled nearly $100 billion in 2019, or 2.9 percent of total federal tax receipts.

Excise taxes are narrowly based taxes on consumption, levied on specific goods, services, and activities. They can be either a per unit tax (such as the per gallon tax on gasoline) or a percentage of price (such as the airline ticket tax). Generally, excise taxes are collected from producers or wholesalers, and are embedded in the price paid by final consumers.

Federal excise tax revenue has declined over time relative to the size of the economy. As a percentage of gross domestic product (GDP), excise tax revenue fell from 2.7 percent in 1950 to 0.7 percent by 1979 (figure 1). Receipts temporarily increased because of the crude oil windfall profit tax imposed in 1980, but excluding that tax, (the dashed line in figure 1) revenue was about 0.7 percent of GDP through the 1980s and 1990s. Excise tax revenues as a percentage of GDP gradually declined again throughout the 2000s to roughly 0.4 percent in recent years.

General Fund or Trust Fund Revenues

Excise tax revenue is either transferred to the general fund or allocated to trust funds dedicated to specified purposes. General fund excise taxes account for roughly 40 percent of total excise receipts, with the remaining 60 percent going to trust funds.

General fund excise taxes are imposed on many goods and services, the most prominent of which are alcohol, tobacco, and health insurance. Other general fund excise taxes include taxes on local telephone service, vehicles with low-mileage ratings (“gas guzzlers”), ozone-depleting chemicals, and indoor tanning services.

Excise taxes dedicated to trust funds finance transportation as well as environmental- and health-related spending. The Highway Trust Fund and the Airport and Airway Trust Fund account for over 90 percent of trust fund excise tax receipts, mostly from taxes on gasoline and other transportation fuels (Highway Trust Fund), and air travel (Airport and Airway Trust Fund).

Major federal excise taxes

Five categories of excise taxes—highway, aviation, tobacco, alcohol, and health—accounted for 93 percent of total excise tax receipts in 2019 (figure 2).

Excise Taxes Dedicated to the Highway Trust Fund

Highway-related excise tax revenue totaled $40.5 billion in 2019, 41 percent of all excise tax revenue. Gasoline and diesel taxes, which are 18.4 and 24.4 cents per gallon, respectively, make up over 90 percent of total highway tax revenue, with the remaining from taxes on other fuels, trucks, trailers, and tires. (The tax rates for gasoline and diesel include a 0.1 percent tax earmarked for the Leaking Underground Storage Tank Trust Fund.) Most other motor fuels are also subject to excise taxes, although “partially exempt” fuels produced from natural gas are taxed at much lower rates. Tax credits for producers of certain fuels deemed environmentally superior—including biodiesel, renewable diesel mixtures, alternative fuel, and alternative fuel mixtures—expired at the end of 2017 but were generally extended in December 2019 retroactively from 2018 through end of 2022, except for the alternatives fuels credit was extended only through 2020.

Excises Taxes Dedicated to the Airport and Airway Trust Fund

Revenue from excise taxes dedicated to the Airport and Airway Trust Fund totaled $16.0 billion in 2019, accounting for 16 percent of all excise tax receipts. According to Congressional Budget Office data, more than 90 percent of aviation excise taxes came from taxing passenger airfares, with the remaining coming from taxes on air cargo and aviation fuels.

Domestic air travel is subject to a 7.5 percent tax based on the ticket price plus $4.30 (in 2020) for each flight segment (one takeoff and one landing). A 6.25 percent tax is charged on domestic cargo transportation. International arrivals and departures are taxed at $18.90 per person (in 2020); there is no tax on international cargo. Both the domestic segment fee and the international arrivals and departures fee are indexed for inflation.

Tobacco Excise Taxes

Revenue from tobacco taxes totaled $12.5 billion in 2019, accounting for 13 percent of all excise tax revenue. Federal excise taxes are imposed on tobacco products, which include cigarettes, cigars, snuff, chewing tobacco, pipe tobacco, and roll-your-own tobacco. The tax is calculated per thousand cigars or cigarettes or per pound of tobacco, depending on the product. The tax equals about $1.00 per pack of 20 cigarettes. Cigarette papers and tubes are also subject to tax. Tobacco taxes are collected when the products leave bonded premises for domestic distribution. Exported products are exempt. Unlike other excise taxes collected by the IRS, alcohol and tobacco taxes are collected by the Alcohol and Tobacco Tax and Trade Bureau of the US Treasury Department.

Alcohol Excise Taxes

Excise tax revenue from alcoholic beverages amounted to $10.0 billion in 2019, 10 percent of total excise receipts. There are different tax rates for distilled spirits, wine, and beer. Distilled spirits generally are taxed at $13.50 per proof gallon (a proof gallon is one liquid gallon that is 50 percent alcohol), but a lower rate ($13.34) applies through end of 2020 to quantities of less than 22.23 million proof gallons removed from the distillery or imported. Tax rates on wines vary based on type and alcohol content, ranging from $1.07 per gallon for wines with 16 percent alcohol or less to $3.40 per gallon for sparkling wines, but lower rates also apply through end of 2020 to smaller quantities of wine removed or imported. Beer is typically taxed at $18.00 per barrel (31 gallons), although a reduced rate of $3.50 per barrel applied to the first 60,000 barrels for breweries that produce less than two million barrels. Lower rates apply in both cases through end of 2020. Note that the alcohol content of beer and wine is taxed at a much lower rate than the alcohol content of distilled spirits.

Excise Taxes Enacted by the Affordable Care Act

The Affordable Care Act (ACA) legislation passed in 2010 contained several health-related excise taxes.

  • The largest is an annual fee on health insurance providers. This fee represents a fixed aggregate amount for each calendar year ($9.6 billion for 2019), imposed on insurance providers according to their market share. Various Appropriations acts suspended this tax for 2017 and 2019. It returned in 2020, but is repealed for 2021 and thereafter.
  • Starting in 2014, an annual fee also applies to manufacturers and importers of branded prescription drugs, which, like the annual fee on health insurance providers, is a fixed aggregate amount for each calendar year ($2.8 billion in 2020 and thereafter) allocated in proportion to sales.
  • A 40 percent excise tax on certain high-cost employer-sponsored health insurance plans (the “Cadillac tax”) was scheduled to begin in 2018 but Congress passed a two-year postponement of the excise tax, and later extended the suspension through 2022. The tax was repealed in December 2019.
  • Other health care–related excise taxes include a 2.3 percent tax on medical devices and a 10 percent tax on indoor tanning services. Congress suspended the excise tax on medical devices various times since implementation, and recently repealed it altogether in December 2019.

Health-related excise tax revenue totaled $12.0 billion in 2019, 12 percent of total excise receipts.

The ACA also imposed two additional taxes—a penalty tax on individuals without essential health insurance coverage (the “individual mandate”) as an incentive to buy it, and a penalty tax on large employers that choose not to offer health care coverage (the “employer mandate”). The 2017 Tax Cuts and Jobs Act eliminated the individual mandate starting in 2019. This will reduce revenue but on net save money for the federal government because without the individual mandate, fewer people will enroll in government-subsidized health insurance programs and the saving from lower Medicaid costs and tax subsidies for health insurance premiums will exceed the lost revenues. Eliminating the individual mandate, however, will increase the number of people without health insurance—by an estimated 7 million more people by 2021, according to the Congressional Budget Office.

Updated May 2020
Data Sources

Congressional Budget Office. 2019. “Federal Subsidies for Health Insurance Coverage for People Under Age 65: 2019 to 2029.” Washington, DC: Congressional Budget Office.

Internal Revenue Service. 2020. “Annual Fee on Branded Prescription Drug Manufacturers and Importers.” Updated February 21, 2020.

———. 2020. "Affordable Care Act Provision 9010 - Health Insurance Providers Fee." Updated January 14, 2020.

———. 2020. "Indoor Tanning Services Tax Center." Updated January 16, 2020.

Alcohol and Tobacco, Tax and Trade Bureau. 2020. "Tax and Fee Rates." US Department of the Treasury. Updated March 6, 2020.

Office of Management and Budget. Budget of the United States Government, Fiscal Year 2021, Historical Tables. Table 2.3. “Receipts by Source as a Percentage of GDP: 1934–2025”; Table 2.4. “Composition of Social Insurance and Retirement Receipts and of Excise Taxes: 1940–2025.”

Further Reading

Congressional Budget Office. 2018. The Budget and Economic Outlook: 2018 to 2028. Washington DC: Congressional Budget Office.

Joint Committee on Taxation. 2015a. “Present Law and Background Information on Federal Excise Taxes.” JCS-1-11. Washington, DC: Joint Committee on Taxation.

———. 2015b. “Exclusion for Employer-Provided Health Benefits and Other Health-Related Provisions of the Internal Revenue Code: Present Law and Selected Estimates.” JCX-25-16. Washington, DC: Joint Committee on Taxation.

Looney, Adam. 2018. “Who Benefits from the ‘Craft Beverage’ Tax Cuts? Mostly Foreign and Industrial Producers.” Washington, DC: Brookings Institution.

Rosenberg, Joseph. 2015. “The Distributional Burden of Federal Excise Taxes.” Washington, DC: Urban-Brookings Tax Policy Center.

Individual Taxes
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