Types of Excise Taxes

by Ian Kenney ; Updated July 27, 2017
Taxes are a part of life in more ways than one

Taxes permeate every part of a modern adult’s daily life, sometimes in ways that are difficult to spot. Excise taxes, often called hidden taxes, are levied on a particular item and built into its price, meaning consumers are not always aware of the tax impact. Excise taxes imposed to fund specific programs or even modify behavior have existed for centuries.

Window Tax

The "Window Tax" was an early form of excise tax levied in 16th and 17th century England. Income tax at the time was widely regarded as a privacy invasion, so King William III sidestepped controversy by imposing a tax on the number of windows in a person’s residence. The idea was that wealthier individuals would have homes with more windows, making the tax progressive, or higher for people with more money, as most income taxes are today.

Sin Taxes

Some excise taxes are levied in an effort to modify behavior. The rationale is that “sinful” behaviors like smoking and drinking end up costing the state money in added health care costs or traffic accidents. High taxes on such items not only raise revenue to offset the costs of the behavior but, it is hoped, also curb such behavior.

Gasoline Tax

The tax on gasoline in the United States is levied to cover the cost of road building and maintenance and other transportation projects. Many countries do not specifically tie the revenue to related costs and instead use it to add to the general fund. Since the U.S. gas tax directly funds the roads on which the cars using the gas drive, it is considered a users tax. Like all excise taxes, it is built into the cost of the commodity, in this case a gallon of gasoline. Federal and state governments both levy gas taxes, and some states require that the total taxes per gallon of gas be displayed at the pump.

Cadillac Tax

During the U.S. health care reform debate in 2009 and 2010, one of the more contentious arguments surrounded the funding mechanism known as the “Cadillac Tax.” The tax was proposed not just as a revenue generator but ultimately as a cost control. “Cadillac” in this case referred to generous health insurance benefits valued above a certain level that would be taxed like regular income (rather than exempted in full as they were previously). The hope was that consumers would drive down cost by choosing less expensive benefit plans, and employers would over time convert the savings to increased wages. While congressional negotiations softened the impact of he tax, a form of it will become law in the United States in 2014.

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