Federal Excise Tax on Tires: Where the Rubber Meets the Road
CRS Report for Congress
Federal Excise Tax on Tires:
Where the Rubber Meets the Road
Updated April 4, 2006
Pamela J. Jackson
Analyst in Public Sector Economics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Federal Excise Tax on Tires:
Where the Rubber Meets the Road
Summary
The excise tax on tires was first levied in 1918 mainly because of revenue needs
brought about by World War I. The tax was reduced after the war and then repealed
in 1926. The levy was reintroduced during the Great Depression at a time when
federal individual income tax revenues were plummeting and was increased to help
finance World War II. A general reduction in rates was in the offing just before the
outbreak of the Korean conflict but revenue needs brought about by that war
prevented the lowering of rates. More recent history shows that in 1956 the rate of
the tax was raised in response to legislation enacted to build the interstate highway
system and to create the Highway Trust Fund. Scheduled reductions did not occur
after the construction of the interstate highway system had been extended. A goal of
the Surface Transportation Assistance Act of 1982 was to redistribute highway costs
between car and truck users. At that time, the tax structure was changed so that the
tax was imposed only on heavy tires with tax rates that are graduated, and increased
along with the tire’s weight. The Taxpayer Relief Act of 1997 repealed the exclusion
of the value of the tires from the 12% retail excise tax on heavy highway trucks,
trailers, and tractors, but provided a credit offset to the retail tax for the tire tax paid.
Under the American Jobs Creation Act of 2004 the tax based on tire weight was
replaced with rates based on the load capacity of the tire. The federal excise tax
imposed on tires is now scheduled to expire on October 1, 2011.
Today, the premise for the excise tax on tires is that heavier vehicles cause
greater damage to both roadways and bridges, and that the excise tax on tires
resembles a pricing mechanism that is a proxy for highway wear-and-tear charges.
This premise still holds true as load capacity must exceed 3,500 pounds before the
tax is imposed, thus exempting tires on lighter vehicles. Tire excise taxes still
produce revenues for the Highway Trust Fund and repeal of the existing tax would
require additional taxes to be imposed on other sources so as to provide an equivalent
amount of revenues to build and maintain roadways. This excise tax is said to be
easy to administer with minimal federal collection costs.
Several arguments are advanced against the imposition of the tire tax. First,
some view this selective excise tax as discriminating against the tire and related
industries whose products are taxed and also the trucking industry, which depends
on the product. The commercial truck transportation industry pays this tax while
competitors such as railroads and waterways have no corresponding excise tax, thus
creating an intermodal equity issue. Second, to the extent that the excise tax on tires
is passed forward into the cost of goods sold, it places a burden on lower income
individuals since individuals with lower incomes, relative to those with higher
incomes, tend to spend a larger portion of their income for the same consumption
amount (thus, to the extent that the tax is passed forward to consumers, the tax is
regressive).
This report will not be updated.
Contents
Legislative History and Rationale.....................................1
Recent Developments..............................................5
Why is the Tax Based on Weight or Load Capacity — Rather than Sales
Price? .......................................................5
Assessment .......................................................6
Revenues ........................................................7
List of Tables
Table 1. Excise Tax Rates on Tires Under the Surface Transportation Assistance
Act of 1982..................................................3
Table 2. Excise Tax Collections on Tires, Tubes, and Tread Rubber..........8
Federal Excise Tax on Tires:
Where the Rubber Meets the Road
Legislative History and Rationale
A history of the federal excise tax on tires shows that initial adoption occurred
as a result of the revenue needs of World War I with the inclusion of the tax in the1
Revenue Act of 1918. This act imposed the tax on both tires and tubes at the rate
of 5% of the retail price. At the conclusion of the war, certain fiscal problems of the
United States remained and because of revenue needs, the excise tax was extended
at the same rate by the Revenue Act of 1921.2 As the financial condition of the
country improved, the tax was first reduced from 5% to 2½% by the Revenue Act of
Today’s excise tax derives from the re-institution of the tax (at 2¼ cents per5
pound on tires and 4 cents per pound on inner tubes) by the Revenue Act of 1932.
The 1932 Act changed the structure of the tax, from a tax on price to a tax on weight.6
The First Revenue Act of 1940 raised the tax rates to 2½ cents and 4½ cents per
pound, respectively. The reintroduction of the excise tax and increase in rate was
primarily brought about to make up for the reduction in revenues from income taxes
caused by the Great Depression. At that time, the excise tax on tires and tubes was
not viewed as a hardship on business.
The Revenue Act of 19417 increased the tax rates from 4 cents to 9 cents on
tubes and from 2¼ cents to 5 cents on tires. (Various excise tax rates were increased
as a part of a general increase in taxes during the World War II period.) There were
no rate changes in 1943. However, the Revenue Act of 19438 redefined rubber to
include synthetic and substitute rubber and later the rates were codified in the Internal
Revenue Code of 1954.9
1 Revenue Act of 1918, P.L. 254, 65th Cong., approved Feb. 24, 1919.
2 Revenue Act of 1921, P.L. 98, 67th Cong., approved Nov. 23, 1921.
3 Revenue Act of 1924, P.L. 176, 68th Cong., approved June 2, 1924.
4 Revenue Act of 1926, P.L. 20, 69th Cong., approved Feb. 26, 1926.
5 Revenue Act of 1932, P.L. 154, 72nd Cong., approved June 6, 1932.
6 Revenue Act of 1940, P.L. 656, 76th Cong., approved June 25, 1940.
7 Revenue Act of 1941, P.L. 250, 77th Cong., approved Sept. 20, 1941.
8 Revenue Act of 1943, P.L. 235, 78th Cong., approved Feb.25, 1944.
9 1954 Internal Revenue Code, P.L. 591, 83rd Cong., approved August 16, 1954.
The Federal-Aid Highway Act of 195610 provided for a significant expansion
of the federal-aid highway program and authorized federal funding over a longer
period of time so as to permit long-range planning. It was considered necessary to
authorize the entire Interstate Highway program to assure orderly planning and
completion of this network of highways throughout the United States as efficiently
and as economically as possible. In the case of tire taxes, the act raised certain rates
and expanded the rate structure by prescribing different rates for different tire types.
Tires for highway vehicles were taxed at 8 cents per pound, other tires at 5 cents per
pound, inner tubes at 9 cents per pound, and tread rubber at 3 cents per pound. From
that time forward, proceeds from tire excise taxes have been transferred to the
Highway Trust Fund established by that act. The act provided for a rate reduction in
1972, which was rescheduled because the interstate highway system was still under
construction.
In 1960, an act called Excise Tax: Laminated Tires11 provided a lower tax rate
of 1 cent per pound for laminated tires which “consist wholly of scrap rubber” and
“not of the type used on highway vehicles.” Congress recognized that the very heavy
weight of laminated tires disadvantaged this new small industry since the tax
represented nearly 20% of the retail cost of the tire.
The excise tax rates on tires were once again changed in 1961.12 This time the
Federal-Aid Highway Act of 196113 provided excise tax rate increases to 10 cents per
pound for highway vehicle tires (up 2 cents per pound); 10 cents per pound for inner
tubes (up 1 cent per pound); and 5 cents per pound of tread rubber (up 2 cents per
pound). Rates of 5 cents per pound for other than laminated and 1 cent for laminated
tires were left intact without change. Again, rate reductions were scheduled for 1972.
Three subsequent public laws (P.L. 91-605, P.L. 94-280, and P.L. 95-599)14
postponed the scheduled rate reductions first from 1972 to 1977, then from 1977 to
1979, and finally from 1979 to 1984. Thus, as the Highway Trust Fund was
extended, so too were the excise taxes that financed the national highway system.
A reduction in the rate of the tire excise tax of 2.5% was part of the
Determination of Second Tier Taxes enacted in 1980.15 The provision reduced the tax
rate applicable to new highway tires to 9.75 cents per pound and for non-highway
tires to 4.875 cents per pound. The law also phased out credits and refunds of tire
excise taxes made pursuant to a warranty or guarantee after 1982. The purpose of
10 Highway Revenue Act of 1956, P.L. 627, 84th Cong., approved June 29, 1956.
11 Excise Tax: Laminated Tires, P.L. 86-440, approved April 22, 1960.
12 In “real” terms-that is, after adjusting for inflation-these rates were far lower than the
original levies in the 1930s.
13 Federal-Aid Highway Act of 1961, P.L. 87-61, approved June 29, 1961.
14 Federal-Aid Highway Act of 1970, P.L. 91-605, approved Dec. 31, 1970; Federal-Aid
Highway Act of 1976, P.L. 94-280, approved May 5, 1976; and Surface Transportation
Assistance Act of 1978, P.L. 95-599, approved Nov. 6, 1978.
15 Second Tier Excise Taxes, P.L. 96-596, approved Dec. 24, 1980.
making these changes was to simplify collection procedures without significantly
affecting overall tax receipts.
In an effort to stimulate job creation, the Congress passed the Surface
Transportation Assistance Act of 1982.16 One of its goals (besides increased
revenues for construction and maintenance of the Nation’s highways) was a
redistribution of highway costs between car and truck users. Accordingly, the act
changed several of the excise taxes that fund the Highway Trust Fund. For example,
the excise taxes on tread rubber and inner tubes were repealed as were the taxes on
nonhighway and laminated tires. A new tax structure for heavy tires with graduated
excise tax rates dependent on tire weight was established. Tires which weigh less
than 40 pounds were exempted from excise tax so that tires for most passenger cars
are no longer taxable. The excise tax rates on heavy tires ranged from 15 to 90 cents
a pound according to the weight of the tire. These rates are shown in the following
table.
Table 1. Excise Tax Rates on Tires Under the Surface
Transportation Assistance Act of 1982
Weight of TireTax
0- 40 lbs.No tax
Source: H.Rept. 97-987, pp. 89, 184.
Included in the Tax Reform Act of 198417 were minor refund provisions for tire
stock and tread rubber floor stock. These provisions adjusted for taxes previously
paid on dealer stock that had not yet been sold. From 1982 through the end of 2004,
excise tax rates were not changed but various tax acts which have extended the
interstate highway system have also extended the tire excise taxes.
An indirect change occurred to the federal tire excise tax under the Taxpayer
Relief Act of 1997. The modification made by the act was in response to disputes
occurring during tax audits. The tire excise tax is based on weight rather than as a
tax on the retail selling price18 In addition to the federal tax on tires, there is a federal
retail excise tax (12%) imposed on heavy highway trucks, trailers, and tractors. Since
the tires were taxed separately, the tires’ retail sales value was not being included in
determining the federal retail excise tax on heavy vehicles. Under the act, the value
of tires was to be included in determining the federal retail sales tax. However, a
16 Surface Transportation Assistance Act of 1982, P.L. 97-424, approved Jan. 6, 1983.
17 Tax Reform Act of 1984 (also know as the Deficit Reduction Act of 1984), P.L. 98-369,
approved July 18, 1984.
18 See the discussion in the following section entitled Why Weight Instead of Sales Price?.
credit for the amount of tire excise taxes paid was allowed against the retail sales tax
on heavy highway vehicles. The change was effective as of January 1, 1998. The
Joint Tax Committee estimated that this change would increase federal revenues by
$452 million during the FY1997-FY2002 period and $979 million during the
FY1997-FY2007 period.19 The excise tax on tires was last extended under the
Surface Transportation Revenue Act of 1998.20
The American Jobs Creation Act of 200421 changed the method of taxing tires
from the graduated weight structure of prior law to a tax based on the load capacity
of the tire.22 The tax is set at the rate of 9.45 cents for each 10 pounds of tire load
capacity in excess of 3,500 pounds. In the case of super single or bias ply tires the
tax rate is set at 4.725 cents for each 10 pounds tire load capacity in excess of 3,500
pounds. This change has been scored by the Joint Committee on Taxation as having
a negligible impact on federal revenues. It was argued that the lower rate on super
single or bias ply tires is justified since bias ply tires do not last as long and therefore
must be replaced more frequently than radial tires. We are unaware of any studies
which support or rebut this assertion. However, it is reported that bias ply tires are
used to a greater extent on construction and farm equipment vehicles. Thus, while
tires on these vehicles may carry the same heavy loads as radial tires, they often
travel less frequently and for shorter distances on highways and thoroughfares which
are supported by the tire tax. The American Jobs Creation Act of 2004 also provided
that tires sold for the exclusive use of the Department of Defense or the Coast Guard
would be exempt from the tax. A former exemption for tires with an internal wire
fastening agent was repealed from the law.23
A provision included in the Energy Tax Incentives Act of 2005 clarifies the
definition of super single tires. Super single tires are those with a width greater than
13 inches. They are “designed to replace two tires in a dual fitment” and are subject
to a lower tax rate of 4.725 cents for each 10 pounds load capacity exceeding 3,500
pounds. Under the clarification, a super single tire does not include tires designed
to serve as steering tires since steering axles are not equipped with a dual fitment.
The clarification was made effective as if included in the American Jobs Creation
Act of 2004. The revenue effect was scored as being negligible. Also included in
this legislation is a requirement that the Internal Revenue Service collect revenue
data for each class of taxable tire beginning January 1, 2006. This report is to include
19 U.S. Congress, House Conference Report, Taxpayer Relief Act of 1997, Conference
Report to Accompany H.R. 2014, H.Rept. 105-220, 105th Cong., 1st sess., (Washington:
GPO, 1997), p. 793.
20 Surface Transportation Revenue Act of 1998, P.L. 105-178, approved June 9, 1998.
21 American Jobs Creation Act of 2004, P.L. 108-357, approved October 22, 2004.
22 The Department of Transportation requires that the tire load capacity be stamped on the
side of highway tires. Administration is simplified since tire manufacturers, producers,
importers and the Internal Revenue Service will no longer be required to weigh sample
batches of tires to determine the tax.
23 The Conference Committee Report noted that recapped and retreaded tires are not to be
subject to the tax.
revenue collections made from the tire taxes prior to the change in taxing load
capacity. The report is scheduled to be submitted to Congress by July 1, 2007.
The tire excise tax is currently scheduled to expire on October 1, 2011.
However, if one uses the past as a guide, it appears likely that the tax will see further
extension.
Recent Developments
Congress continues to consider highway reauthorization proposals in the 109th
Congress. While the highway, public transit and road safety projects funding levels
expire on May 31, 2005, the federal excise tax on tires does not expire until
September 30, 2005. The House of Representatives approved a $283.9 billion bill
entitled the Transportation Equity Act: A Legacy for Users (H.R. 3) in a 417 to 9
vote on March 10, 2005. That legislation includes an extension of the tire tax
through September 30, 2011.
Likewise, the Senate has passed its version of the bill entitled the Safe,
Accountable Flexible, Efficient Transportation Equity Bill of 2005 (SAFETEA) in
a vote of 89 to 11 on May 17, 2005. The Senate’s version of the bill adds $11.2
billion in additional revenues all of which is fully offset. It is argued that this
additional revenue is needed so that all states will receive as much in federal highway
aid as they pay in federal gasoline excise taxes. Like the House of Representatives,
the Senate’s proposal would extend the tire tax through September 30, 2011.
The White House remains committed to the funding level proposed by the
President in his FY2005 budget. The President’s senior advisors have recommended
that he veto the legislation if his net funding authorization level ($283.9 billion over24
six years) is not met.
Why is the Tax Based on Weight or Load Capacity
— Rather than Sales Price?
There are two main reasons why the tax is imposed upon the weight or load
capacity rather than the sales price of tires. At the time of World War II, there simply
were no substitutes for rubber and no domestic rubber supply. Since rubber was a
necessary commodity for the war effort, the imposition of this excise tax was used
as a means to discourage domestic consumption. As such, the person using more
rubber — and heavier tires — would shoulder a heavier tax burden than those
persons conserving the valuable commodity.
In this manner, two objectives were accomplished. First, the purchaser would
purchase tires with less rubber content and manufacturers were provided with an
24 Jeff Carlson and Paula Cruickshank, “Senate Backs Increased Highway Spending,” 2005
Taxday, Commerce Clearing House, May 12, 2005, C 1.
incentive to find alternate means of making tires with less rubber or with other
substitutes. Synthetic tires were brought on the market shortly after this time.
Ironically, an excise tax was placed upon these synthetic tires because the revenue
needs of the country were still the primary motive for the excise tax on tires and
tubes.
The second reason for basing the tax on weight or load capacity is that it is a
manufacturer’s excise tax that is assumed to be passed forward to the eventual
consumer. Administratively, the tax is much easier to collect from a few
manufacturers than from the many dealers that sell tires. If sales price were used,
then collection would have to be assigned at the point the consumer actually takes
possession of the tire. Because of sales, trade-ins, etc., the tax would be more
difficult to monitor and the number of firms collecting and, thus, remitting revenues
to the Internal Revenue Service (IRS) would be much greater, resulting in greater
administrative collection expense for IRS.
The proposed change from a weight based tax to a tax based on load capacity
does not change the collection point of this manufacturers tax. As such, it should not
affect the number of collection points. Thus, it is generally believed that it should
not greatly affect the collection process.
Assessment
Because it funds highway construction, the excise tax on truck tires is often
referred to as a “user tax.” It is generally held that heavier vehicles such as trucks
cause greater damage to both roadways and bridges. Thus, the tax on heavy tires for
trucks resembles a pricing mechanism with the tax viewed as a proxy for highway
wear-and-tear charges. While these taxes now apply only to heavy tires, they still
produce substantial amounts of needed tax revenues for the Highway Trust Fund.
The repeal of tire excise taxes would require additional taxes to be imposed on other
sources in order to provide equivalent amounts of income for the Highway Trust
Fund. In its current form, this excise tax is easy to administer and, therefore,
collection costs are kept to a minimum for the IRS.
Several arguments have been advanced against the continued imposition of this
excise tax. First, excise taxes have traditionally been associated with luxury items.
Early in this century, those owning automobiles (and thus, needing tires) were
generally wealthy individuals. In contrast, in the modern economy, tires play a vital
and necessary role in the overall transportation system and are no longer thought of
as luxuries. Second, selective excise taxes discriminate against industries whose
products are taxed. In this case, the commercial trucking industry must pay this
excise tax while the chief competitors of truck transportation, namely the railroads
and waterways, have no corresponding excise tax. Thus, a question of intermodal
equity arises. Finally, as noted earlier, excise taxes have their greatest impact on
lower income individuals and are not based on the ability-to-pay principal. To the
extent that the excise tax on truck tires is passed forward in the cost of goods sold,
it places the greatest burden on lower income individuals because individuals with
lower incomes tend to spend a larger portion of their income on these goods in
contrast to individuals with higher incomes.
Revenues
As noted, revenues collected from the federal excise tax on tires are dedicated
to the Highway Trust Fund. The table (appearing on the following page) provides
an historical review of those revenue collections. Early years include tax receipts
collected from the excise tax on inner tubes and tread rubber as well as the tax on
tires. Today, revenues from the excise tax on tires provide less than 2% of the
Highway Trust Fund receipts.
Table 2. Excise Tax Collections on Tires,
Tubes, and Tread Rubber
(in nominal dollars)
FiscalCollections(in thousandsFiscalCollections(in thousands ofFiscalCollections(in thousands
Yearof dollars)Yeardollars)Yearof dollars)
1933 14,980 1956 177,872 1984 417,973
1934 27,630 1957 251,454 1985 242,923
1935 26,638 1958 259,820 1986 285,728
1936 32,208 1959 278,911 1987 296,408
1937 40,819 1960 304,466 1988 319,141
1938 31,567 1967 503,753 1989 312,829
1939 34,819 1968 489,139 1990 296,042
1940 41,555 1969 631,527 1991 284,360
1941 51,054 1970 614,795 1992 279,852
1942 64,811 1971 593,377 1993 311,442
1943 18,345 1972 681,320 1994 357,500
1944 40,334 1973 814,042 1995 389,900
1945 75,257 1974 827,256 1996 354,100
1946 118,092 1975 697,660 1997 368,500
1947 174,927 1976 730,117 1998 388,594
1948 159,284 T Q 218,038 1999 416,658
1949 150,899 1977 792,957 2000 420,299
1950 151,795 1978 846,313 2001 354,769
1951 198,383 1979 878,283 2002 372,800
1952 161,328 1980 682,624 2003 403,892
1953 180,047 1981 668,902
1954 152,567 1982 616,784
1955 164,316 1983 677,966
Sources: For fiscal years 1933 to 1961, collection figures have been taken from the Annual
Report of the Secretary of the Treasury on the State of the Finances for the fiscal year ended
June 30, 1962.
For fiscal years 1962 to 1979, collection figures have been taken from the Statistical
Appendix to the Annual Report of the Secretary of the Treasury on the State of the Finances
for FY1979.
For fiscal years 1980 to 1987, collection figures have been derived from appropriate
Annual Reports of the Commissioner of Internal Revenue published by the Department of
the Treasury, Internal Revenue Service, Publication 55.
For fiscal years 1988 to 1992, collection figures have been derived from appropriate
information releases entitled Internal Revenue Report of Excise Taxes.
For fiscal years 1993 to 1999, collection figures have been taken from the Internal
Revenue Service Statistics of Income Bulletin, v. 19, no. 4, Spring 2000. pp. 242-243.
For fiscal years 2000 to 2003, collection figures have been taken from the Internal
Revenue Service Statistics of Income Bulletin, v. 24, no. 3, Winter 2004-2005. p. 152