Excise Taxation and Interest Group Politics

Abstract

Excise taxes represent a small, but not insignificant, source of tax revenue in the United States. Federal excise taxes make up about 6.6 percent of all federal taxes, state excise taxes make up about 16 percent of all State taxes, and local excise taxes are about three percent of all local taxes. Aggregating across governments, excise taxes are about eight percent of total taxes in the United States.1 Public finance theory offers several justifications for relying on excise taxes, and this chapter offers a critical assessment of the standard public finance analysis of excise tax policy. One fundamental problem with the standard public finance approach to excise taxation is that it does not consider the political environment within which excise taxes are created. This is a problem with the economic analysis of taxation in general, but the political environment creates more problems for excise taxation than for other types of taxes, for several reasons. After considering the problems that interest group politics raises for the application of excise taxes, the chapter then discusses optimal excise tax policy in light of the political environment of excise taxation. The chapter concludes that in general, excise taxes should be avoided, but that they may be justified in certain narrow cases where the revenues from the tax clearly finance a benefit targeted to those who pay the tax.