Excise taxes are imposed on specific types or categories of goods, unlike broad-based consumption taxes, such as sales taxes and value-added taxes. A century ago, almost half of all federal revenue came from excise taxes on products such as distilled spirits and tobacco; customs duties on imported goods also played a larger role in early US history compared to today.
Today, excise taxes account for only two percent of federal revenue. In 2024, the gasoline tax was the largest ($26 billion), followed by air travel ($13 billion), alcohol ($11 billion), and tobacco ($9 billion). Similarly, customs duties have consistently comprised two percent or less of federal revenue in recent decades, though new tariffs introduced in 2025 caused a spike from $77 billion in 2024 to $195 billion in 2025 (but much of that is due to be refunded after certain tariffs were ruled illegal).
Excise taxes fall into two categories: a user-pays model, where taxes fund a related program (such as gasoline and truck taxes dedicated to the Highway Trust Fund), or a tax on socially harmful activity. The latter can be justified when an activity imposes costs on others not reflected in the market price, though such costs are difficult to measure and translate into an optimal tax rate. The more successful these taxes are at discouraging behavior, the less revenue they raise. Tariffs lack both justifications and instead are aimed at reducing foreign competition and raising revenue.
Economically, excise taxes and tariffs primarily burden labor. They create a wedge between the prices consumers pay and the prices producers receive, reducing income available to compensate workers and business owners, without directly affecting the after-tax return on new investment. Consider an individual who earns $1 after tax: they can consume it today or save it and earn a 5 percent return, purchasing $1.05 in goods next year. An excise tax does not change this trade-off. As a result, the burden falls primarily on labor income, reducing real after-tax wages, hours worked, and output. The exception is when taxes apply to capital goods or inputs, which can also affect investment.
This chapter considers several excise tax and tariff options. For excise taxes, we consider changes to areas where the US already has federal excise taxes, such as transportation, as well as the possibility of a tax on greenhouse gas emissions. We also look at several major tariff proposals.
Note: Reform options presented within Options for Reforming America's Tax Code 3.0 illustrate the economic, revenue, and distributional tradeoffs of each tax option and are not necessarily endorsed or opposed by Tax Foundation.