What Is Excise Tax? Definition, Examples and How It Works
Written by
Kellan Jansen
Edited by
Joe Evans
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Have you ever wondered why gas, cigarettes or alcohol cost so much? The answer often comes down to an excise tax — a special tax that’s built right into the price of certain goods.
So, what is excise tax, and how does it work?
Whether you’re a shopper trying to save money or a small business owner figuring out tax rules, understanding excise taxes can help you make smarter choices.
What Is Excise Tax?
Simply put, an excise tax is a fee the government charges on specific products or services, like gas, cigarettes or alcohol.
Unlike sales tax, which applies broadly to most things you buy, excise tax targets certain items — often the ones the government wants people to buy less of.
In fact, according to the Congressional Budget Office, the federal government collected over $84 billion in excise tax revenue in 2022, mostly coming from fuel, tobacco and alcohol taxes.
Excise Tax vs. Sales Tax
Both excise tax and sales tax can raise the price of products, but they work differently:
| Feature | Excise Tax | Sales Tax |
|---|---|---|
| Applies to | Specific products/services | Most goods and services |
| How it’s charged | Built into the price | Added at the register |
| Who pays it | Business pays the government, costs passed to the consumer | Collected from customers at checkout |
| Examples | Gas, tobacco, alcohol | Clothing, electronics, groceries |
How Excise Taxes Work
Who Pays Excise Taxes?
While businesses technically pay excise taxes to the government, the cost is passed along to customers in the form of higher prices.
For example, when you fill up your car, you’re paying 18.3 cents per gallon in federal excise tax — before state taxes are even added.
When Excise Taxes Are Applied
Excise taxes are usually added at the manufacturing or wholesale level, meaning they’re already baked into the price by the time you see it on the shelf.
That’s why you don’t see “excise tax” listed on your receipt — it’s hidden in the price you pay.
Examples of Excise Taxes
Excise taxes show up in all kinds of products and services. Here are some common examples:
- Fuel and gasoline: 18.3 cents per gallon federal tax, plus state taxes (some states add over 50 cents per gallon!)
- Tobacco products: $1.01 per pack (federal), plus state taxes
- Alcohol: $3.50 per barrel for beer (domestic)
- Sports betting: 0.25% tax for legal bets; 2% for illegal bets
- Tanning salons: 10% federal excise tax
Types of Excise Taxes
Ad Valorem Taxes
These are based on the product’s value. For example, a 10% tax on indoor tanning services means you pay more if the service costs more.
Specific Taxes
These are fixed amounts per unit sold. For example, gas is taxed at 18.3 cents per gallon, regardless of the price per gallon.
Excise Taxes on Retirement Accounts
If you withdraw money early from a retirement account (before age 59½), you might pay a 10% federal excise tax penalty.
Federal Excise Taxes
The federal government sets excise taxes on items like fuel, alcohol, and tobacco. These taxes add up: in 2022, fuel taxes alone contributed over $36 billion to the Highway Trust Fund.
Can You Avoid or Deduct Excise Taxes?
For Consumers
It’s tough to avoid excise taxes because they’re built into prices. But you can:
- Choose alternatives, like driving an electric car to skip gas taxes.
- Cut back on products like tobacco or alcohol.
For Businesses
Businesses may deduct excise taxes as part of their operating expenses. If you’re a business owner, consult a tax pro or check IRS rules to see what’s deductible.
States With the Highest and Lowest Excise Taxes
Excise tax rates vary by state. For example:
- Highest gas taxes: California (around 68 cents per gallon total)
- Lowest gas taxes: Alaska (around 15 cents per gallon)
Why Governments Use Excise Taxes
Excise taxes serve two main purposes:
- Raise money for public programs (like highway maintenance from fuel taxes)
- Discourage certain behaviors (like smoking and excessive drinking)
Final Take to GO: What to Know About Excise Tax
Excise taxes are hidden in the prices of everyday items, from gas to cigarettes. Knowing how excise taxes work can help you budget smarter and avoid surprises.
If you’re a business owner, understanding excise taxes can keep you compliant and help you manage your costs.
Want to dive deeper? Check out our guides on how to file business taxes, what is sales tax and tax deductions for small businesses. And if you have questions, don’t hesitate to ask a tax professional.
FAQs About Excise Taxes
Learn more about the excise tax and how to factor it into your budget:- What is excise tax?
- Excise tax is a tax on specific goods or services, like fuel, tobacco and alcohol, built into the price.
- Who pays excise tax?
- Businesses pay it to the government, but the cost is passed along to consumers.
- Can I deduct excise taxes?
- Businesses may deduct excise taxes as part of expenses, but consumers generally can’t.
- Are there federal excise taxes?
- Yes, federal excise taxes apply to fuel, tobacco, alcohol and other products.
- What’s the difference between excise tax and sales tax?
- Excise tax is built into the price of specific items, while sales tax is added at the register on a wide range of products.
Angela Mae contributed to the reporting of this article.
Information is accurate as of June 3, 2025.
Editorial Note: This content is not provided by any entity covered in this article. Any opinions, analyses, reviews, ratings or recommendations expressed in this article are those of the author alone and have not been reviewed, approved or otherwise endorsed by any entity named in this article.
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- IRS. "Excise Tax."
- CBO. "Budget Options."
- IRS. "An Overview of Excise Tax."
- Madison Trust. "What Is the Most Taxed State?"
