Get Announcement 97-25 - Changes To Excise Taxes. Changes To Excise Taxes

Excise taxes increase production costs by adding an extra cost for each unit sold. They are sometimes used to discourage the slae of a good the government deems harmful, such as cigarettes and alcohol.

How do taxes impact supply and demand? Excise taxes are one of the six determinants of supply. They shift the supply curve to the left decreasing supply and increasing the equilibrium price. The supply curve will shift until the vertical distance between the two curves is equal to the amount of the tax.

In the short run, an excise tax increases the price of the product, albeit by less than the full amount of the tax, and the price burden is shared by both the producers and the consumers. The exact effect depends on the elas- ticities of demand and supply for the product.

In general, an excise tax is a tax is imposed on the sale of specific goods or services, or on certain uses. Federal excise tax is usually imposed on the sale of things like fuel, airline tickets, heavy trucks and highway tractors, indoor tanning, tires, tobacco and other goods and services.

Excise taxes tend to be regressive, in that lower-income households generally pay a larger share of their income in excise taxes than higher-income households. Because excise taxes generally increase the price of the taxed commodity, they also tend to lower consumer demand.

Because these taxes are very narrow, excise tax hikes can be detrimental to specific industries and certain types of consumers. Their design also makes them poor sustainable revenue tools, as revenue tends to be volatile and the tax burden tends to be regressive.

Early studies showed that increases in beer taxes significantly reduced fatal motor-vehicle crash rates, particularly among youth (Cook 1981; Saffer and Grossman 1987a, b).