Publications / Policy Report

In Slump, Localities Resort to Excise Taxes

By / 1.30.2012

Nobody likes excise taxes—those annoying extra costs people notice only because of how narrow and random they are. They show up on hotel bills and cell phone bills. They are added on to the cost of alcohol, gasoline, and cigarettes. And the list keeps growing. For example, in 2010, Newark, New Jersey, imposed a 5% tax on rental cars while Baltimore imposed a 2-cent per bottle tax on soda.

New data from the Census Bureau shows just how much local governments relied on in-creases in excise taxes to fill budget holes during the recession. PPI calculates that excise tax revenues collected by local governments—not including gas or tobacco—increased 5.2% from 2007 to 2009, compared to a decline of 8.1% in national retail spending by consumers, including restaurants. Even when you add in gas and tobacco, excise tax revenues rose by 4.5% during the recession, while local government general sales tax revenues went up 1.6% and national output (GDP) declined by 0.6%.

The large growth in excise taxes relative to the drop in retail sales shows that during a time when incomes were down, local government turned to these narrow, selective taxes imposed on consumers to make up the balance. For example, two tourist meccas, Las Vegas and New York City, raised hotel room taxes in 2009.

In Slump, Localities Resort to Excise Taxes

While the data reported in the chart applies only to local governments, state govern-ments also looked to excise taxes to solve their financial woes. In fact, 22 states raised excise taxes on tobacco, alcohol, or motor fuel in 2008 and 2009, with 24 states enacting other types of excise tax increases during the same period.

Download the report.