Excise Taxes: Sleeping Giant Getting Bigger

Excise Taxes: Sleeping Giant Getting Bigger

Will the advent of health care reform excise taxes change the excise tax landscape? Strong attention directed at the merits of health care reform could radically change the political implications of excise taxation as taxpayer burdens grow.

Throughout most of American history, the majority of the federal government's tax revenues have been generated from excise taxes, tariffs, and customs duties.  In fact, from1868 to1913, almost 90 percent of the federal government's revenue was collected from excise taxes.[1] Early on, Congress imposed excise taxes on distilled spirits, refined sugar and other items to pay for the Revolutionary War. Later, excise taxation of gunpowder, playing cards, feathers, pianos, billiard tables, and whiskey financed the War of 1812 and the Civil War.

An excise taxation eclipse of sorts began with the seminal advent of federal income taxation in 1913. Of course, the objective dimension of income taxation's increasing importance since 1913 is the huge revenues it has produced over the years ($1.053 trillion in 2009).[2] But income taxation's place as a political lightning rod is a second, and subjective, dimension.

From this standpoint, excise tax has been in the shadows, at least relatively so, and this has been great news for politicos trying to figure out how to get more tax dollars. In comparison to income taxes, excise taxes seem to attract little attention or pushback from the electorate. A docile public that stands by and pays these taxes with little or no objection is counterintuitive because federal excise taxes:

  1. Are huge and growing fast. In 2009, excise taxes generated $62 billion. An equal or greater amount was raised in state excise taxes. Federal excise taxes run in 4th place behind individual income, corporate income, and social insurance/retirement taxes; [3] and
  2. Can be highly regressive, such as those imposed on alcohol, tobaccoair transportation, and  motor fuels. Those with lower income pay a higher percentage of their income on such goods because goods are taxed at the same percentage rate. For example, in each of America's 200 million licensed drivers pay an average of $444 in gasoline taxes.[4]

However, health care reform excise taxes are looming. A tanning services tax, effective July 1 2010, is the first of many excise taxes related to this year's health care reform legislation. We will see a host of other such taxes between now and 2018.

Look for political fallout as penalties are imposed on individuals without minimum health insurance coverage, high cost employer-sponsored health care insurance plans, medical device sales, and large employers out of compliance with new health insurance requirements.   

[1] "Fact Sheets: History of the U.S. Tax System," Dept. of the Treasury

[2] "Joint Statement of Tim Geithner, Secretary of the Treasury, and Peter Orszag, Director of the Office of Management and Budget, on Budget Results for Fiscal Year 2009," Dept. of the Treasury (Oct. 16, 2009)

[3]  Id.

[4]  Table, "Federal Excise Taxes Reported to or Collected by the Internal Revenue Service, Alcohol and Tobacco Tax and Trade Bureau, and Customs Service, by Type or Excise Tax, Fiscal Years 1996-2008-continued," Tax Policy Center (Aug. 21, 2009).


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