Lena Savoie
Alcohol excise taxes are a contentious issue in the United States, with spirits being taxed more heavily than other alcoholic beverages with the same alcohol content. Excise taxes are consumption taxes levied on specific goods and services, and alcohol excise taxes are among the oldest in the nation, with the first whiskey tax being levied in 1791. These taxes are intended to reduce the external harms of alcohol consumption, such as drunk driving and property damage, and to generate revenue for anti-addiction programs and sober driving incentives. Spirits are subject to a federal excise tax of up to $13.50 per proof gallon, while wine and beer are taxed at lower rates based on their alcohol content.
| Characteristics | Values |
|---|---|
| Basis for calculation | Alcohol content |
| What is taxed | Beer, wine, distilled spirits |
| How often is it levied | Per gallon |
| Who pays the tax | Producers or wholesalers |
| Who ultimately bears the tax | Final consumers |
| Purpose | Reducing external harms created by alcohol consumption, generating revenue |
| Tax rates | $13.50 per proof gallon for distilled spirits, $1.07-$3.40 per gallon for wines, $18.00 per barrel for beer |
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What You'll Learn
Federal excise tax on spirits
Federal excise taxes on spirits in the US are levied on distilled spirits and are based on quantity, with spirits taxed more heavily than other alcoholic beverages with the same alcohol content. This tax is separate from any general sales taxes that may be applied by state or municipal governments.
The federal excise tax (FET) on distilled spirits was reduced for 2018 and 2019 due to an amendment in the tax bill signed by President Trump in December 2017. Before this amendment, distillers paid the US Treasury an excise tax of $13.50 for every proof gallon (a gallon of spirit at 50% ABV). Starting in 2018, the FET for distilled spirits was broken down into three brackets.
The specific amount of federal excise tax paid depends on the quantity of the beverage and is subject to change over time. Distilled spirits producers (DSPs) generated about $4.185 billion in revenue for the US Treasury in 2016. Applying the new FET system to average taxable removals in proof gallons would result in a slightly lower revenue estimate of $4.088 billion.
It is important to note that some reduced tax rates and tax credits for distilled spirits may be available if certain criteria are met, such as those related to production, processing, or foreign assignments. Additionally, the effective tax rate for distilled spirits may be lower based on tax credits for eligible wine or eligible flavor content.
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Federal excise tax on wine
Federal excise taxes are levied on alcohol to reduce the external harms associated with alcohol consumption, such as drunk driving, violence, and property damage. Excise taxes also generate revenue to fund anti-addiction programs and education initiatives. Wine, in particular, is subject to an excise tax based on its alcohol content and carbonation level. The current tax rate for wine falls between $1.07 and $3.40 per gallon.
Qualifying small domestic wineries that produce 250,000 wine gallons or less are eligible for tax credits. These credits can amount to 90 cents per gallon on the first 100,000 gallons produced, with a phase-out between 150,000 and 250,000 gallons. Hard cider, which is taxed similarly to wine, benefits from lower tax rates and a reduced credit amount.
To calculate the federal excise tax on wine, you need to determine the total volume of wine produced or sold, as the tax is levied per gallon. The specific rate within the range of $1.07 to $3.40 per gallon will depend on the alcohol content and carbonation level of the wine. For example, a higher alcohol content may push the excise tax closer to $3.40 per gallon. Conversely, a lower alcohol content and minimal carbonation could result in a tax rate closer to $1.07 per gallon.
It is important to note that wineries with expected annual taxes of less than $1000 may file a single excise tax return for the calendar year. This return is typically due 30 days after the close of the calendar year. However, if the total excise taxes exceed $5 million annually, electronic filing is required. Penalties may be imposed for failure to file a return, failure to pay the excise tax on time, or failure to make timely electronic funds transfers (EFTs).
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Federal excise tax on beer
Federal excise taxes are imposed on several goods and services, including alcohol. Excise taxes are consumption taxes levied on specific goods and services and are usually collected from the producers or wholesalers and embedded in the final price paid by the consumer.
Federal excise taxes on alcohol are calculated based on the amount of alcohol sold, typically expressed in dollars per gallon. For beer, the federal excise tax is usually levied at $18 per barrel, with reduced rates for breweries producing less than two million barrels. This translates to approximately $0.56 per gallon, considering a standard beer barrel contains 31 gallons.
It's important to note that state-specific excise taxes also apply to beer, and these rates can vary across states. Some states have a license retail system, where private vendors are licensed to distribute beer, while others have a control system, where the state sets the price for alcohol products, combining cost, markup, and taxes.
In addition to federal and state excise taxes, other taxes and duties may apply to beer at the state or local level, such as sales taxes, which can vary within each state depending on whether the sales are on-premise or off-premise. These additional taxes can further impact the final price paid by consumers for beer and other alcoholic beverages.
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Federal excise tax on health-related goods
Federal excise taxes are levied on specific goods, services, and activities. These taxes are usually imposed at the federal level but can also be applied by state and local governments. Excise taxes are collected from producers or wholesalers and are embedded in the price paid by the final consumers. They are considered indirect taxes and are typically paid by businesses but passed on to consumers in the form of higher prices.
Federal excise tax revenues—collected from sales of motor fuel, airline tickets, tobacco, alcohol, and health-related goods and services—totaled nearly $90 billion in 2022, or 1.8% of total federal tax receipts. Excise taxes dedicated to trust funds finance transportation, environmental, and health-related spending. The Highway Trust Fund and the Airport and Airway Trust Fund account for over 90% of trust fund excise tax receipts. Five categories of excise taxes—highway, aviation, tobacco, alcohol, and health—accounted for the vast majority of total excise tax receipts in 2022.
Health-related excise taxes are imposed on certain insurance policies, self-insured health plans, and obligations not in registered form. An issuer of a specified health insurance policy is liable for a fee for policy years ending on or after October 1, 2012, and before October 1, 2019. To determine the average number of lives covered under a specified health insurance policy during a policy year, an issuer must use one of the methods outlined in the relevant regulations. These methods include the actual count method, the snapshot method, the member months method, and the state form method.
Businesses charging and collecting excise taxes on health-related goods and services are required to file Form 720 Federal Excise Tax Return on a quarterly basis, which includes quarterly payments. These businesses must also pass on the excise taxes to state and local governments as required. In the case of self-insured health plans, each employer, employee organization, and board of trustees that establishes or maintains the plan is considered a plan sponsor and must file a separate Form 720, reflecting its separate liability.
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Federal excise tax on tobacco
Tobacco was one of the first consumer goods to be taxed in North America, with the first federal excise tax on tobacco products introduced by Alexander Hamilton in 1794. Since then, federal taxes on tobacco have been part of the federal tax system. The federal tax on tobacco has fluctuated over time, influenced by historical events such as the Civil War and the need for additional revenue.
Federal excise taxes on tobacco products are levied in two ways: the unit tax and the ad valorem tax. The unit tax is a constant nominal rate per unit, typically applied to cigarettes, small cigars, and smokeless tobacco products. On the other hand, the ad valorem tax is based on a constant fraction of the wholesale or retail price and is typically applied to large cigars.
As of June 2019, there is a federal excise tax of $1.01 per pack of cigarettes, excluding additional taxes levied by municipalities and sales taxes. States also play a role in tobacco taxation, with all 50 states and the District of Columbia imposing taxes on cigarettes. Some states have excise taxes on specific types of tobacco products, such as smokeless tobacco or e-cigarettes, while others provide exemptions for certain products.
The impact of excise taxes on tobacco products goes beyond revenue generation. Incremental increases in excise taxes can influence smoking behaviour, especially among young people. Higher tobacco prices resulting from excise taxes are an effective strategy to discourage tobacco use, improve public health, and reduce healthcare costs. For example, an increase in excise taxes in Massachusetts, combined with an anti-smoking campaign, led to a significant decline in cigarette consumption per capita.
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Frequently asked questions
Federal excise tax is a tax levied on the consumption of specific goods, services, and activities. It can be imposed per unit or as a percentage of the price.
The federal excise tax on alcohol is based on the type of alcohol and its alcohol content. Distilled spirits are taxed at $13.50 per proof gallon, wines vary from $1.07 to $3.40 per gallon depending on alcohol content, and beer is typically taxed at $18.00 per barrel.
Yes, reduced tax rates may be available for certain producers or products. For example, lower rates apply for the first 750,000 gallons of wine in a given year, and breweries producing less than two million barrels of beer may also qualify for reduced rates.
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