RS20172: Excise Taxes on Alcohol, Tobacco, and Gasoline:
History and Inflation-Adjusted Rates

Louis Alan Talley

Research Analyst in Taxation
Government and Finance Division

Brian W. Cashell

Specialist in Quantitative Economics
Government and Finance Division

April 22, 1999

Introduction

An excise tax is a selective sales tax levied on a specific commodity or service. While federal excise taxes have long been a part of the U.S. revenue structure, they have played a reduced role in recent years. Today, excise tax receipts are no longer a major source of federal revenue. For FY1999, they are estimated to represent but 3.8% of total federal receipts. They are projected to slightly decrease to 3.7% of receipts in FY2000 and to remain at 3.7% in FY2001, before decreasing to 3.6% in FY2002. Projections are that they will remain at 3.7% in FY2003 before declining to 3.5% in FY2004.⁽¹⁾

This report provides inflation-adjusted excise tax rates for alcohol, tobacco, and gasoline products. The base for computation is November 1951. All of the above cited commodities had rate increases effective for that date under the Revenue Act of 1951. The adjustments show what the tax rates would be in 1999 if they had been increased to reflect inflation.⁽²⁾

A brief history of alcohol, tobacco, and gasoline tax rates since 1951 along with current revenues from these excise taxes is provided. At the end of this report, a table shows the inflation-adjusted excise tax rates using the Consumer Price Index for All Urban Consumers (CPI-U). The CPI-U index numbers for November 1951 through December 1998 were used for computational purposes. With the exception of gasoline and low-alcohol still wine, if the statutory tax rates had kept pace with inflation then they would be far higher today.

Alcohol

The tax rate on distilled spirits, set in November 1951 at $10.50 per proof gallon was raised in October 1985 to $12.50 per proof gallon. The rate had remained unchanged for 34 years. The Joint Committee on Taxation noted that ... "the tax is imposed as a flat amount, rather than as a percentage of sales price, [and] the effective level of the tax had declined by more than 70% in constant dollars since that increase. Congress believed, therefore, that a modest adjustment of $2.00, to $12.50 per proof gallon, was appropriate."⁽³⁾ Under the Revenue Reconciliation Act of 1990, the rate was increased by $1.00 per proof gallon to $13.50 effective January 1, 1991.

The tax rate on beer was raised in November 1, 1951, from $8.00 to $9.00 per barrel. The Revenue Reconciliation Act of 1990 doubled the existing rate; thus, the new rate is $18.00 per barrel. The 1990 Act retained the small producer exception of prior law. Thus, a lower rate applies to small brewers who produce fewer than two million barrels of beer per year. The rate for small brewers, which has been in effect since February 1977, is $7.00 per barrel for the first 60,000 barrels. (A barrel contains 31 gallons.)

The excise tax rate on wines was set in November 1951 at a variety of rates which ranged between 17 cents per wine gallon for still wine to $3.40 per wine gallon on sparkling wines. Until the 1990 Act, the tax rates on still wines had not been changed since 1951. However, as the Korean conflict continued, the need for additional revenues resulted in increases in the rates on champagnes and sparkling wines and artificially carbonated wines. Thus, in 1955 the rate on champagnes and sparkling wines was increased from $2.72 to $3.40 per wine gallon and the rate on artificially carbonated wine from $1.92 to $2.40 per wine gallon.

Under provisions of the Revenue Reconciliation Act of 1990, the rates on six categories of wine range from $1.07 to $3.40 per wine gallon. These rates are detailed in table 2. A small domestic wineries credit equal to 90 cents per wine gallon is provided for the first 100,000 gallons of wine production with a phase-out of the credit for wineries whose production falls between 150,000 to 250,000 gallons.⁽⁴⁾

In addition to the excise taxes on alcohol products, there are also occupational taxes. A producer/manufacturer of taxable alcohol products with gross receipts of less than half a million dollars in the preceding taxable year must pay a tax of $500 a year. For those whose gross receipts exceed that amount, the tax is $1,000 a year per place of business. Additionally, alcoholic beverage wholesalers pay a wholesale dealer occupational tax of $500 per year per place of business, while alcoholic beverage retailers pay at a rate of $250 per year per place of business.

The Department of Treasury's Bureau of Alcohol, Tobacco and Firearms (BATF) reports the following breakdown of actual FY1998 collections of alcohol taxes: $3.508 billion for distilled spirits; $3.385 billion for beer; $630 million for wines; and $106 million in special (occupational) tax.⁽⁵⁾ The Budget of the United States Government for 2000 estimates that alcohol tax receipts will hold steady at $7.2 billion from FY1999 through FY2004.⁽⁶⁾ Revenues collected from all alcohol excise taxes go into the General Fund of the United States Treasury. As such, these revenues are not specifically dedicated for any trust fund.

Tobacco

The tax rate on cigarettes remained unchanged between 1951 and 1982. The rate was increased from 8 cents to 16 cents per pack as part of the Tax Equity and Fiscal Responsibility Act of 1982. The reason for that increase was stated in the general explanation of that tax act.

The prior law cigarette excise tax rates had not been increased since 1951. Since the tax is imposed as a set amount, rather than as a percentage of sales price, the effective level of the tax had declined by more than 70% in constant dollars since it was last amended. Congress believed, therefore, that an adjustment to the tax was appropriate. Doubling the tax rate, as was done under the Act, does not increase the per-pack tax, in real terms, above the 1951 level.

Also, Congress determined that the broad-based increase in revenue required by the fiscal outlook through 1985 mandated an increase in the cigarette excise taxes through fiscal year 1985.⁽⁷⁾

The next increase in tobacco excise tax rates fell under provisions in the Revenue Reconciliation Act of 1990 (RRA90). At that time, tobacco tax rates were increased because of large continuing federal budget deficits and the need for additional federal revenues. The new tax rates became effective in two stages. The first increase in rates was effective as of January 1, 1991, while the second increase occurred January 1, 1993. The total rate increase, to 24 cents per pack, equals a 50% increase in tax rates, with one-half the total increase effective in 1991 and one-half effective in 1993.

Tobacco excise tax rates are scheduled to rise under legislation enacted in 1997. That act, the Balanced Budget Act of 1997, like the prior law under RRA90, provides increased rates in two stages. The rates are first scheduled to increase on January 1, 2000, and then two years later on January 1, 2002. In the case of cigarettes, the rates will rise 10 cents a pack to 34 cents and then an additional 5 cents to 39 cents per pack. In addition, this legislation established a tax rate for roll-your-own tobacco.

It was estimated in the Budget of the United States Government for Fiscal Year 2000 that collections of tobacco taxes would be approximately $5.2 billion in FY1999. As reported in the Budget, actual receipts for FY1996 were $5.657 billion. Because of the legislated increase in tobacco tax rates, revenues are expected to rise to $7.705 billion in FY2000. Revenues are projected to remain stable (between $7.5 and $7.6 billion in FYs 2001-2004.⁽⁸⁾ Like alcohol tax receipts, tobacco taxes currently are deposited into the General Fund of the United States Treasury and are not dedicated to any trust fund.

Gasoline

The federal excise tax on gasoline became law at a one-cent per gallon rate with the passage of the Revenue Act of 1932. The imposition of a gasoline tax was imposed to help offset a federal budgetary imbalance during the Great Depression. Since that time, the tax has been extended and/or raised many times. Table 2 (which can be found on the following page) provides a summary of federal gasoline excise tax rates since 1951.

In 1956, Congress established the Highway Trust Fund and revenue receipts from the gasoline tax were dedicated for highway programs. The conventional wisdom that the gas tax represented a user tax held from that time until passage of the Omnibus Budget Reconciliation Act of 1990 (OBRA90). With passage of OBRA90, a small part of the gasoline tax increase was allocated to general revenues, thus returning it to the role it served prior to the establishment of the Highway Trust Fund, at least in part.

Table 1. Gasoline: Summary of Changes in the Rate of the Federal Manufacturers' Excise Tax on Gasoline

^a This act provided that the 0.1 cents per gallon tax will terminate on the earlier of December 31, 1991, or when the Secretary of the Treasury determines that taxes equivalent to at least $500 million in net revenues are in the Trust Fund. This additional tax terminated after August 31, 1990, because the LUST Trust Fund had reached its net revenue target for termination. (Internal Revenue Service Announcement 90­82, released June 27, 1990.)

^b Beginning on October 1, 1995, the revenues collected from the OBRA90 2.5 cents "deficit reduction rate" were credited to the account of the Highway Trust Fund. Thus, the distribution of amounts collected from the gasoline excise tax changed. The Highway Trust Fund receives increased revenues since the rate credited to that fund increased to 14 cents. At this same time, the amount credited to the General Fund decreased from 6.8 to 4.3 cents.

^c Pursuant to provisions of OBRA90, the LUST tax terminated on December 31, 1995.

^d Beginning on October 1, 1997, the Taxpayer Relief Act of 1997 provides that amounts previously dedicated for deficit reduction be redirected to the Highway Trust Fund. Additionally, the LUST tax which had terminated on December 31, 1996 was reauthorized for the period October 1, 1997, through March 31, 2005.

A provision in the Taxpayer Relief Act of 1997 returns the General Fund portion of the tax back to the Highway Trust Fund. This provision provides that the 4.3 cent tax is divided between the Highway Account (3.45 cents) and the Mass Transit Account (0.85 cents). The provision became effective on October 1, 1997. Thus, of the total 18.3 cents dedicated to the Highway Trust Fund, 15.45 cents goes to the Highway Account and 2.85 cents to the Mass Transit Account. Amounts in the Mass Transit Account can be used for capital, capital-related and operating expenditures under the Urban Mass Transportation Act of 1964. Additionally, transfers from the Highway Trust Fund may be made into the Land and Water Conservation Fund, and the Boating Safety Account of the Aquatic Resources Trust Fund. The funds so transferred are equivalent to the gasoline taxes collected on the fuel used in motorboats.

In addition, the Taxpayer Relief Act of 1997 reinstated the Leaking Underground Storage Tank Trust Fund excise tax which had expired January 1, 1996. The tax is reinstated at its prior tax rate of 0.1 cent per gallon on all types of motor fuels. The tax rate change is effective from October 1, 1997, through March 31, 2005.

The Budget of the United States Government for Fiscal Year 2000 states that actual FY1998 collections for the Highway Trust Fund were $26.628 billion. Receipts for this trust fund are estimated to rise to $38.464 billion in FY1999, then fall to $33.097 billion in FY2000, with a rise to approximately $34 billion in fiscal years 2002 and 2003. The trust funds receipts are expected to further rise to $35.539 billion in FY2004. The Budget states that actual FY1998 collections for the Leaking Underground Storage Trust Fund were $136 million.

Inflation Adjustment

The figures in Table 2 show what the current excise tax rates on alcohol, tobacco, and gasoline would be if they had been indexed for inflation since November 1951. To update these rates, the Consumer Price Index for All Urban Consumers numbers for November 1951 and December 1998 were used.⁽⁹⁾

Table 2. Comparison of 1951 and 1999 Statutory Rates and Inflation Adjusted Excise Tax Rates

Note: The Inflation adjustment was made using the Consumer Price Index for All Urban Consumers (CPI-U) for November 1951 and December 1998.

Footnotes

1. ^(back)U.S. Office of Management and Budget. Budget of the United States Government, FY2000, Historical Tables. February 1999. p. 30.

2. ^(back)Just as the Congress was prepared to lower excise tax rates because of peacetime conditions, plans were revised as a result of the start of the Korean War. Thus, the Revenue Act of 1951 was born out of revenue needs due to increased military expenditures.

3. ^(back)U.S. Congress. Joint Committee on Taxation. General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (H.R. 4170, 98^th Congress; Public Law 98-369). Washington, U.S. Govt. Print. Off., 1984. p. 32. (JCS-41-84)

4. ^(back)For additional information see CRS Report RS20093 (pdf), Excise Taxes on Wines: Rates and Revenues, by Louis Alan Talley.

5. ^(back)U.S. Department of the Treasury. Bureau of Alcohol, Tobacco and Firearms. Alcohol, Tobacco and Firearms Tax Collections. December 31, 1998. p. 1.

6. ^(back)U.S. Office of Management and Budget. Budget of the United States Government, FY2000, Historical Tables. February 1999. p. 39.

7. ^(back)U.S. Congress. Joint Committee on Taxation. General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (H.R. 4961, 97^th Congress; Public Law 97-248). Washington, U.S. Govt. Print. Off., 1982. p. 411. (JCS-38-82)

8. ^(back)Ibid. Budget of the United States Government, FY2000, Historical Tables.

9. ^(back)The CPI-U is published by the Department of Labor, Bureau of Labor Statistics. For a description, see CRS Report RL30074 (pdf), The Consumer Price Index: A Brief Overview, by Brian W. Cashell. Recent methodological revisions have affected measured rates of inflation. For additional information see CRS Report RL30019 (pdf), The Consumer Price Index: Recent Improvements, and What's New for 1999, by Brian W. Cashell.