CRS Examines History of Alcohol, Gas, Tobacco Excise Taxes

An excise tax is a selective sales tax levied on a specific commodity or service. Although 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 FY2005 and FY2006, they are estimated to represent but 3.6% and 3.5% respectively of total federal receipts. Excise tax receipts are projected to decrease slightly to 3.3% of receipts for FY2007 before declining further to 3.1% in FY2008. They are projected to remain the same percentage (3.1%) in FY2009 and to drop to 2.9% in FY2010.¹

Since excise taxes on alcohol, tobacco, and gasoline are levied per unit of the product (in rem) rather than as a percentage of the product's value (ad valorem), they do not rise automatically with inflation. Any adjustment must be made by an act of Congress. This report provides calculations of what excise tax rates for alcohol, tobacco, and gasoline products would be if they had kept pace with inflation. 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 1951.² The adjustments show what the tax rates would be for September 2005 if they had been increased to reflect inflation.

A brief history of alcohol, tobacco, and gasoline tax rates (Table 1) since 1951 along with current revenues from these excise taxes is provided. At the end of this report, Table 2 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 September 2005 were used for computational purposes. With the exception of gasoline, 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 (RRA90), the rate was further 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 RRA90 doubled the existing rate; thus, the rate is $18.00 per barrel. The RRA90 retained the small producer exception of prior law. Thus, a lower rate applies to part of the production of 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.⁴

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 passage of the RRA90, 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 RRA90, 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.

There were occupational taxes. A producer/manufacturer of taxable alcohol products with gross receipts of less than half a million dollars in the preceding taxable year had to pay a tax of $500 a year. For those whose gross receipts exceeded that amount, the tax was $1,000 a year per place of business. Alcoholic beverage wholesalers paid a wholesale dealer occupational tax of $500 per year per place of business, while alcoholic beverage retailers paid at a rate of $250 per year per place of business.⁵

The Internal Revenue Service reports the following breakdown of actual FY2001collections of alcohol taxes: $4.296 billion for distilled spirits; $3.660 billion for beer; $768 million for wines; and $94 million in special (occupational) tax.⁶ The Budget of the United States Government for 2006 estimates that alcohol tax receipts will be $7.9 and $8.0 billion respectively for FY2005 and FY2006 before rising to $8.3 billion in FY2008. It is estimated that alcohol revenues will further rise to $8.6 billion in FY2009 and $8.7 billion in FY 2010.⁷ Revenues collected from all alcohol excise taxes go into the General Fund of the United States Treasury. 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.

Tobacco excise tax rates rose under the Balanced Budget Act of 1997. Like the prior law under RRA90, the act provides increased rates in two stages. The rates first increased on January 1, 2000, and from that date rose again two years later on January 1, 2002. In the case of cigarettes, the rates rose 10 cents a pack to 34 cents and increased an additional 5 cents to 39 cents per pack in 2002. This legislation established a tax rate for roll-your-own tobacco for the first time.

As reported in the Budget of the United States Government for Fiscal Year 2006 actual receipts for FY2004 were $7.9 billion. Revenues are expected to remain at approximately the same level in FY2005. Revenues are projected to decline to $7.7 billion in FY2006, $7.6 billion in FY2007, $7.5 billion in FY2008, $7.3 billion in FY2009, and $7.2 billion in FY2010.⁹ Like alcohol tax receipts, tobacco taxes 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 1 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 convention 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

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 2006 states that actual FY2004 collections for the Highway Trust Fund were $34.7 billion. Receipts for this trust fund are estimated to rise to $38.8 billion in FY2005, then rise to $40.2 billion in FY2006, $41 billion in fiscal year 2007, $41.7 billion in FY2008, $42.5 billion in FY2009, and $43.1 billion in FY2010. The Budget states that actual FY2004 collections for the Leaking Underground Storage Tank Trust Fund were $189 million.¹⁰

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 September 2005 were used.¹¹

 Table 2. Comparison of 1951 and 2005 Statutory Rates and Inflation

² Just as 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 U.S. Congress, Joint Committee on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (H.R. 4170, 98th Congress; Public Law 98- 369), JCS-41-84, 98th Cong., 2d sess. (Washington: GPO, 1984), p. 32.

⁴ A barrel contains 31 gallons.

⁵ The special occupational were initially suspended from July 1, 2005, through June 30, 2008, by a provision of the American Jobs Creation Act of 2004 (P.L. 108.357). A provision included as part of the SAFE Transportation Equity Act of 2005 (P.L. 109-59), repealed the tax effective July 1, 2008.

⁶ U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income Bulletin. (Washington: GPO, Summer 2005), p. 288.

⁷ U.S. Office of Management and Budget, Budget of the United States Government, FY2006, Historical Tables, (Washington: GPO, February 2005), p. 42.

⁸ 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, 97th Congress; Public Law 97-248), JCS-38-82, (Washington: GPO, 1982) p. 411.

⁹Ibid. Budget of the United States Government, FY2006, Historical Tables, p. 42.

¹⁰Ibid. Budget of the United States Government, FY2006, Historical Tables, p. 42.

¹¹ The CPI-U is published by the Department of Labor, Bureau of Labor Statistics. For a description, see CRS Report RL30074, The Consumer Price Index: A Brief Overview, by Brian W. Cashell.