Net income provides a more accurate account of the financial status. Here’s why.
What is excise tax?
Excise tax is a flat-rate tax that applies to specific goods, services, and activities. In the U.S., goods like alcohol and services like indoor tanning are assessed an excise tax, which applies to each unit or occurrence regardless of its cost. Revenue created by excise taxes targets specific needs in a society often directly related to the good or service being taxed.
Excise taxes are a kind of indirect tax, like sales taxes, in that they’re passed on to the customer at the point of sale. But sales tax differs from excise tax in that it applies to virtually all goods while excise taxes only apply in specific instances. These include:
- Air fare and jet fuel.
- Alcohol and tobacco products.
- Indoor tanning and medical devices.
- Telephone services.
In the U.S., excise taxes are levied at the time of production or when a service is rendered, then factored into the product’s cost, meaning that a consumer generally doesn’t know what he’s paying in excise tax if he’s aware he’s paying one at all. Depending on the item, the excise tax might be assessed as a percentage of the final cost, such as the 7.5% charged on air fare, or as a flat dollar amount per unit, like the 18.4 cents charged per gallon of gasoline. There may even be additional excise taxes at the state level.
Sometimes referred to as a “sin tax,” the excise tax has been used to discourage what the government considers unhealthy behavior or to route the revenue collected from it toward fighting the negative consequences of that behavior. However, excise taxes also go toward paying for expenses related to the good being taxed, as in how new road construction is funded by the gasoline tax. Congress determines what items have excise tax by making revisions to the Internal Revenue Service (IRS) tax code.
You’ll barely notice the excise tax on air travel when you book a flight with a high-reward airline credit card.
Excise tax example
One of the ways that President Barack Obama’s Affordable Care Act (ACA) is meant to lower health care costs is by levying various excise taxes across health-related expenses. One of these excise taxes is on so-called “Cadillac” insurance plans, which are health insurance plans that have unusually high premiums. The law defines such plans as those with premiums that cost over $10,200 for an individual and $27,500 for a family, and charges insurers 40% in taxes for every dollar above those amounts. When the Cadillac tax goes into effect, the revenue generated is intended to pay for coverage for those who can’t afford insurance while discouraging insurers from raising premiums too high.