Excise taxes are a type of tax that is levied on specific goods and activities that are considered harmful or undesirable.
Jump to insightExcise taxes are typically included in the price of the item or service, and are paid by the consumer at the time of purchase.
Jump to insightSome states may also impose excise taxes on real estate transactions.
Jump to insightHow excise taxes work
An excise tax is a tax levied on specific goods or activities that are deemed harmful to individuals or the environment. Excise taxes are intended to discourage the consumption or use of certain goods and activities, while also generating revenue for the government.
Who pays excise tax?
The everyday taxpayer may have to pay excise taxes when they purchase goods or services that are subject to these taxes. For example, when you buy gasoline for your car, a portion of the price you pay includes federal and state excise taxes on gasoline.
The same applies to other items like cigarettes, alcohol and airline tickets. In some cases, businesses may be responsible for paying excise taxes, but these costs are often passed on to consumers in the form of higher prices.
» MORE: How to file back taxes
Types of excise tax
Excise taxes come in different forms depending on how the tax is calculated and what’s being taxed. Below are the main types of excise taxes consumers and businesses are most likely to encounter.
Ad valorem vs. specific excise taxes
There are two ways excise tax might be charged on goods and services: ad valorem or specific tax.
- Ad valorem: Latin for “according to value,” ad valorem tax is applied as a fixed percentage. In other words, the amount of the tax is determined by the value of the product or service. Property tax is a common example of this.
- Specific: Specific tax is levied per unit sold and based on quantity. For example, a bottle of wine might be taxed at 7 cents per bottle, regardless of its cost.
If you own a company that is subject to excise taxes and are worried about your IRS bill, consider contacting a tax relief company.
Even though both types of excise taxes are levied against businesses, the cost is often passed down to consumers. Many business owners increase their prices to compensate for the IRS bill.
Examples of excise tax
Excise taxes are taxes imposed on specific goods and services, rather than on income or property. Here are some common examples of excise taxes:
- Fuel tax: Gasoline and diesel fuel are taxed at both federal and state levels. The tax is usually levied per gallon and is meant to fund highway construction and maintenance. Currently, federal excise tax is 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel.
- Firearms and ammunition tax: The current excise tax rate is 10% to 11% of the sales price of firearms and ammunition.
- Cigarettes excise tax: Each pack of cigarettes includes a federal excise tax of around $1 to $2. State and local governments may impose additional taxes on top of the federal excise tax.
- Alcohol excise tax: These taxes vary depending on the type of beverage, its alcohol content and the production capacity of the brewery, winery or distillery.
Note that these taxes are accurate at the time of publication and are subject to change. Taxes also vary by area.
IRA and real estate excise tax
It is possible to pay excise taxes in other areas, too. “If you have excess contributions to your IRA, a 6% excise tax will be applied on the excess amount for each year in which you fail to correct,” said Dr. Lei Han, CPA, associate professor of accounting at Niagara University.
“Early distributions from your IRA or retirement accounts before age 59 1/2 are subject to 10% additional tax unless exceptions apply,” she added.
Additionally, real estate excise tax (REET) is similar and a mandatory tax when you sell or transfer real estate property in certain states.
» MORE: How to file your taxes for free
Pros and cons of excise tax
Excise tax is a common but oft-debated policy tool. They can support public policy goals and generate reliable revenue, but they often raise consumer costs and place a heavier burden on lower-income households.
Pros
- Raises steady revenue for government programs
- Can discourage unhealthy or harmful behavior
- Helps offset social and environmental costs
Cons
- Hits low-income consumers harder than higher earners
- Increases prices for everyday goods and services
- Can reduce demand and strain some industries
Excise tax vs. other tax types
You might confuse excise taxes with other consumption-based taxes, but they work differently depending on what’s taxed and how it's collected. Below is a side-by-side look at how excise taxes compare to other common tax types.
| Feature | Excise tax | Sales tax | Value-added tax (VAT) | Customs duties |
|---|---|---|---|---|
| What it taxes | Specific goods or activities | Most retail goods and services | Most goods and services | Imported goods only |
| How it’s calculated | Per unit or as a percentage | Percentage of sale price | Percentage added at each stage | Percentage of import value |
| When it’s collected | At production, import or sale | At the point of purchase | Throughout the supply chain | When goods enter the country |
| Visibility to consumers | Often built into the price | Shown separately at checkout | Usually included in listed price | Included in import costs |
| Primary purpose | Influence behavior and raise revenue | Raise general revenue | Broad consumption taxation | Regulate trade and protect industries |
| Common examples | Gasoline, alcohol, cigarettes | Clothing, electronics, meals | Consumer goods in many countries | Tariffs on imported steel or cars |
Recent updates to excise tax laws
In the past few years, excise tax laws have evolved at both the federal and state levels, affecting businesses and consumers alike.
At the federal level, the 2025 One, Big, Beautiful Bill Act created a way for taxpayers to claim back federal excise taxes on dyed diesel fuel or kerosene used for nontaxable purposes (for example, farming or construction), with official IRS guidance expected in early 2026 on how to file these refund claims.
State tax changes taking effect in 2026 include increases in cigarette excise taxes — with some states having raised the pack tax rate starting January 1, 2026 — and expansions of taxable tobacco products to include alternatives, like oral nicotine pouches. Lawmakers in places like Maryland are also considering new sugary drink taxes, potentially creating the first statewide soda excise tax.
FAQ
How is an excise tax different from a sales tax?
Excise taxes are often applied to goods and services that are harmful to health or the environment. Sales taxes are applied to a variety of purchases. Additionally, excise taxes are paid by the retailer or producer of the item, while sales taxes are added to the customer’s purchase price.
Who pays excise tax?
Retailers or manufacturers of goods subject to an excise tax will pay that cost. If you’re required to pay an excise tax on your property or IRA, you will pay that cost directly.
How much is excise tax?
This depends on the type of product. Ad valorem excise taxes tend to be between 1% and 10%. Specific excise taxes range from a few cents to several dollars or more. Excise tax may be applied as a percentage of the product’s value or a fixed cost.
If you contribute over the yearly maximum contribution for your IRA, you can be fined a 6% excise tax per year as long as the excess contributions remain in the account.
What goods are subject to excise tax?
Goods that are harmful to the purchaser’s health or the environment are typically subject to this tax. This includes alcohol, cigarettes and gasoline.
Is there a difference between federal and state excise taxes?
The federal, state and local governments may all charge different excise taxes on products. The funds from this tax may flow to different sources, but that is the only difference between them.
Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Washington State Department of Revenue, "Real estate excise tax.” Accessed Jan. 20, 2026.
- Internal Revenue Service, "Excise tax." Accessed Jan. 20, 2026.
- IRS, “Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs).” Accessed Jan. 20, 2026.
- U.S. Energy Information Administration, “How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel?” Accessed Jan. 20, 2026.
- Alcohol and Tobacco Tax and Trade Bureau, "Tax Rates." Accessed Jan. 20, 2026.
- RSM US, "Key 2026 federal excise tax changes for Form 720 filers." Accessed Jan. 22, 2026.
- Tax Foundation, "2026 State Tax Changes Taking Effect January 1st." Accessed Jan. 22, 2026.
- Internal Revenue Service, "One, Big, Beautiful Bill provisions." Accessed Jan. 22, 2026.
- Internal Revenue Service, "Treasury, IRS announce forthcoming guidance on a new method for recovering federal excise tax paid on dyed fuel established under the One, Big, Beautiful Bill." Accessed Jan. 22, 2026.
