America 250: The Evolution of Excise Taxes

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Many aspects of American culture, politics, and global influence have changed in the 250 years since American Independence. The United States went from 13 colonies to 50 states and 14 territories, and with this growth came an expansion of governance and, naturally, taxation.

The most common taxes levied 250 years ago look quite different from the most common taxes today, though many have stuck around in various forms and at different levels of government.

Poll taxes and faculty taxes may essentially be a thing of the past, but property taxes, tariffs, and excise taxes are still used today. However, excise taxes in particular have had a metamorphosis since 1776.

What Is an Excise TaxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.?

Though you may still pay them at the register, excise taxes are not the same as sales taxes. An excise tax is levied on a specific good or activity, usually to curb consumer behavior or offset negative externalities—the side effects or consequences of an activity not included in the cost of that activity—from the good or activity being taxed.

Common excise taxes in the modern US include taxes levied on cigarettes and vape products, betting, alcoholic beverages, gasoline, and amusement activities.

Excise taxes can be used as Pigouvian taxes to address negative externalities (e.g., carbon taxes), but they can also be used as sin taxes to discourage behavior that policymakers simply deem undesirable (e.g., smoking). And other times they function as user fees, where the government charges to directly fund the cost of a provided service (e.g., toll roads).

Excise Taxes in Colonial America

British taxation on the American colonies was a major catalyst for the American Revolution, but most of the tax revolts leading up to the war were in response to one tax type: excise taxes.

The Sugar Act of 1764 imposed taxes on imports of goods like refined sugar and coffee to raise revenue for Great Britain after the Seven Years’ War and led to famous figures like Samuel Adams speaking out about imperial taxation infringing on colonists’ rights.

The Stamp Act of 1765 levied an excise tax on printed media like newspapers, wills, or even playing cards, which incited significant opposition among colonists. Their protests and cries of “liberty, property, and no stamps!”—modeled after similar opposition to a 1763 tax on cider in Britain—forced the Crown to repeal the tax in 1766.

In 1767, Parliament passed the Townshend Acts, which included new taxes on paper, glass, and tea. The colonial resistance to these Acts pushed the British government to send troops to Boston and eventually resulted in the Boston Massacre.

The dissatisfaction with these excise taxes (and other tax squabbles with the British Crown) was at the heart of “no taxation without representation,” the principle that spawned the Declaration of Independence 250 years ago.

Taxes and American independence are deeply intertwined. As a direct result of the American Revolution and the debts incurred from the war, the first nationwide tax was an excise tax levied in 1791 on whiskey production, but it was unpopular and repealed just 11 years later. This Act was levied directly on American producers of whiskey and other alcohol and disproportionately impacted smaller distillers, leading to a famous tax revolt post-Revolution, the Whiskey Rebellion.

Excise Taxes in the 20th Century and Today

Modern America has shifted to reliance on the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source at the federal and state levels for government revenue, but even this shift away from the excise tax is relatively recent.

Revenue from excise taxes accounted for half of federal government revenue during the Great Depression (1934), outdoing revenue from the individual income tax by a wide margin.

While the shift away from excise taxes has been slow, in 1950, excise taxes still made up 20 percent of federal tax collections. Today, the dominant role once held by excise taxes rests with individual income taxes, the top source of federal revenue (39.9 percent) and the third for state revenue (22.8 percent).

Excise taxes have a narrow base (i.e., the goods or activities subject to the tax), making them politically favorable for state lawmakers today. However, this same feature makes them unsustainable for revenue generation and regressive taxes.

While you may not even think of excise taxes when budgeting or spending today, their contribution to the founding of the United States 250 years ago certainly shouldn’t be overlooked.