Excise Tax in The United States - Historical Background

Historical Background

Federal Excise taxes have a storied background in the United States. Responding to an urgent need for revenue following the American Revolutionary War, after passage of the U.S. Constitution the First United States Congress passed, and President George Washington, signed the Tariff Act of July 4, 1789, which authorized the collection of duties on imported goods. Customs duties as set by tariff rates up to 1860 were usually about 80-95% of all federal revenue. Having just fought a war over taxation (among other things) the U.S. Congress wanted a reliable source of income that was relatively unobtrusive and easy to collect.

Tariffs and excise taxes were authorized by the United States Constitution and recommended by the first U.S. Secretary of the Treasury, Alexander Hamilton, in 1789 to tax foreign imports and set up low excise taxes to provide the Federal Government with enough money to pay its operating expenses and to redeem at full value U.S. Federal debts and the debts the states had accumulated during the American Revolutionary War. Hamilton thought it was important to start the U.S. Federal government out on a sound financial basis with good credit.

The first Federal budget was about $4.6 million and the population in the 1790 U.S. Census was about four million. Hence the average federal tax was about $1/person per year. Then tradesmen earned about $0.25 a day for a 10-12 hour day so federal taxes could be paid with about four days work. Paying even this was usually optional as taxed imports listed on the tariff lists could usually be avoided if desired.

Congress set low excise taxes on only a few goods, such as, whiskey, rum, tobacco, snuff and refined sugar. There were initially no other significant sources of federal income besides tariffs. The excise tax on whiskey was so despised it led to the Whiskey Rebellion which had to be quelled by Washington calling up the militia and repressing the rebellious farmers--all were later pardoned. The whiskey excise tax collected so little and was so despised it was abolished by President Thomas Jefferson in 1802.

In the Napoleonic Wars and the War of 1812 the imports to the United States plummeted and the Congress in 1812 brought back the excise tax on whiskey to compensate for the loss of customs revenue. Within a few years customs duties (tariff) brought in enough federal income to again abolish nearly all federal excise taxes. When the United States public debt was finally paid off in 1834 President Andrew Jackson kept the excise tax zeroed out and reduced the customs duties (tariffs) in half.

Excise taxes stayed essentially zero till the American Civil War brought a need for much more federal revenue. Excise taxes were reintroduced on a wider range of items and income taxes (later declared unconstitutional) were introduced.