CRS REPORTS EXCISE TAX RATES FOR GASOLINE, ALCOHOL, AND TOBACCO.

                          Louis Alan Talley

An excise tax is a selective tax levied on a specific commodity or service. While Federal excise taxes have long been a part of U.S. revenue history they have played a reduced role in our revenue structure in recent years. The present excises can best be termed a negligible source of total Federal revenue.

Alcohol, tobacco, and gasoline had excise tax rate increases effective November 1951 under the Revenue Act of 1951. Just as the Congress was prepared to lower excise tax rates because ofpeacetime conditions, plans had to be revised as a result of the start of the Korean War. Thus, the Revenue Act of 1951 was born out of revenue needs which dictated the need for tax increases due to military expenditures.

Until the passage of the Revenue Reconciliation Act of 1990, the tax rates on beer and still wines had not been raised since 1951. This same tax act increased the tax rates on distilled spirits and cigarettes, which previously had only been raised once. In the case of distilled spirits, the rate was increased from $10.50 to $12.50 per proof gallon in October 1985 and increased to $13.50 per proof gallon effective January 1, 1991. The tax rate on cigarettes was increased from 8 cents to 16 cents in 1982 effective January 1, 1983. All tobacco excise taxes were increased by 25 percent effective January 1, 1991, with a second scheduled increase (of the same dollar amount) taking place January 1, 1993. The Federal excise tax rate on a package of cigarettes stands today at $0.24. The excise tax rate on gasoline has been changed many times since 1951 and was increased to its highest level ever by the Revenue Reconciliation Act of 1990.

Typically, those excise tax rates that have been changed have not kept pace with inflation. If excise tax rates had been indexed to the Consumer Price Index for All Urban Consumers (CPI-U) since November 1951, most would be higher than their current rates. With the exception of gasoline and low-alcohol wine, the inflation- adjusted tax rates are far higher than current tax rates. For example, the tax on distilled spirits would be $56.72 per proof gallon instead of the actual $13.50, the tax on beer would be $48.61 per barrel instead of $18, and the tax on tobacco would be 43 cents per pack instead of 24 cents.

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An excise tax is a selective tax levied on a specific commodity or service. While Federal excise taxes have long been a part of U.S. revenue history they have played a reduced role in the Federal Government's revenue structure in recent years. Today, excise tax receipts are a negligible source of Federal revenue. In FY 1992 they represented 4.18 percent of receipts. They are projected to slightly decline to 4.15 percent of receipts in FY 1993 and to 4.10 percent in FY 1994, before increasing to 4.69 percent in FY 1995, 5.13 percent in 1996, and 5.48 percent in FY 1997, before stabilizing around 5.40 percent in FY 1998. 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. Just as the Congress was prepared to lower excise tax rates because of peacetime conditions, plans had to be 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.

A brief history of alcohol, tobacco, and gasoline tax rates since 1951 along with current revenues from these excise taxes is provided. 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 and January 1993 were used for computational purposes. With the exception of gasoline and low- alcohol wine, these inflation-adjusted tax rates are far higher than current law tax rates. A table which summarizes these findings can be found at the end of this report.

ALCOHOL

The tax rate on distilled spirits, set in November 1951, was raised in October 1985, from $10.50 to $12.50 per proof gallon. 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 percent in constant dollars since that increase. Congress believed, therefore, that a modest adjustment of $2.00, to $12.50 per proof gallon, was appropriate." ² 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 new act retained the small producer exception of prior law. Thus, a lower rate applies to small brewers who produce fewer than 2,000,000 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 thirty-one gallons.

The excise tax rate on wines was 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. 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 the rates on champagnes and sparkling wines and artificially carbonated wines being increased in 1955. Thus, 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 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.

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 premise. 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 Budget of the United States Government for Fiscal Year 1994 provides a breakdown of actual FY 1992 collections of alcohol taxes as $4.114 billion for distilled spirits, $3.395 billion for beer, and $614 million for wines. Receipts are estimated to stabilize in FY 1993 at $4.064 billion for distilled spirits, $3.409 billion for beer and $608 million for wine. In FY 1994 receipts are estimated at $4.023 billion for distilled spirits, $3.416 billion for beer, and $602 billion for wine. Special taxes collected in connection with liquor occupations raised $117 million in FY 1992 and are expected to generate $120 million and $125 million in FY 1993 and 1994 respectively. Revenues collected from all alcohol excise taxes go into the receipts 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 explanation of tht tax act. "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 percent in constant dollars since it was last amended. Congress believed, therefore, than 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." ³

Under provisions in the Revenue Reconciliation Act of 1990 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 equals a 50 percent increase in tax rates, with one-half the total increase effective in 1991 and one-half effective in 1993.

The Budget of the United States Government for Fiscal Year 1994 states that actual FY 1992 collections of tobacco taxes were $5.049 billion. Receipts from tobacco taxes are estimated to rise to $5.772 billion in FY 1993, and to $5.797 billion in FY 1994. Like alcohol tax receipts, tobacco taxes go into the general funds of the United States Treasury and are not dedicated to any trust fund.

GASOLINE

The excise tax rate on gasoline was increased from 1.5 cents per gallon to 2 cents per gallon in November 1951. This tax has been extended and/or raised a number of times since 1951, principally because the revenues are dedicated and used to fund the Highway Trust Fund. The tax on gasoline is currently set at 14.1 cents per gallon. Table 1 which appears on the following page shows the tax rates since 1951.

Under current law, 11.5 cents is dedicated to the Highway Trust Fund, 2.5 cents is dedicated for Federal deficit reduction purposes, and 0.1 cents goes into the Leaking Underground Storage Tank Trust Fund (LUST). The 14.1 cents rate is reduced to 11.6 cents on October 1, 1995 when the deficit reduction part of the tax expires, while the LUST tax rate of 0.1 cents per gallon will terminate on December 31, 1995. The 11.5 cents tax on gasoline was extended such that it is presently scheduled to expire on September 30, 1999.

From the Highway Trust Fund, 10 cents is expended on highway related programs with 1.5 cents placed into 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 are made into the National Recreational Trails Trust Fund, the Land and Water Conservation and the Boating Safety Account of the Aquatic Resources Trust Fund. Funds so transferred are equivalent to the gasoline taxes collected on the fuel used in motorboats.

The Budget of the United States Government for Fiscal Year 1994 states that actual FY 1992 collections of gasoline taxes were $12.209 billion. Receipts from gasoline taxes are estimated to rise modestly to $12.354 billion in FY 1993, and to $12.479 billion in FY 1994.

        TABLE 1. Summary of Changes in the Rate of the Federal

We have adjusted the alcohol, tobacco, and gasoline tax rates by use of the Consumer Price Index for All Urban Consumers. The CPI-U is published by the Department of Labor, Bureau of Labor Statistics.

The figures in table 2 show what the current excise taxes on alcohol, tobacco, and gasoline would be if they had been indexed to the CPI-U since November 1951. To update these rates, the CPI-U index numbers for November 1951 and January 1993 were used.

                TABLE 2. Comparison of Excise Tax Rates

² 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). Washington, U.S. Govt. Print. Off., 1984. p. 32.

³ 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). Washington, U.S. Govt. Print. Off., 1982. p. 411.