Federal Excise Tax on Tires: Where the Rubber Meets the Road
Released: 2006-04-04T00:00:00

Legislative History and Rationale

A history of the federal excise tax on tires shows that initial adoption occurred as a result ofthe revenue needs of World War I with the inclusion of the tax in the Revenue Act of 1918. (1) This act imposed the tax onboth tires and tubes at the rate of 5% of the retail price. At the conclusion of the war, certain fiscalproblems of the United States remained and because of revenue needs, the excise tax was extendedat the same rate by the Revenue Act of 1921. (2) As the financial condition of the country improved, the tax wasfirst reduced from 5 to 2 Â½ percent by the Revenue Act of 1924 (3) before being repealed by theRevenue Act of 1926. (4)

Today's excise tax derives from the re-institution of the tax (at 2 1/4 cents per pound on tiresand 4 cents per pound on inner tubes) by the Revenue Act of 1932. (5) The 1932 Act changed thestructure of the tax, from a tax on price to a tax on weight. The First Revenue Act of 1940 (6) raised the tax rates to 2 Â½ centsand 4 Â½ cents per pound, respectively. The reintroduction of the excise tax and increase in rate wasprimarily brought about to make up for the reduction in revenues from income taxes caused by theGreat Depression. At that time, the excise tax on tires and tubes was not viewed as a hardship onbusiness.

The Revenue Act of 1941 (7) increased the tax rates from 4 cents to 9 cents on tubes and from2 1/4 cents to 5 cents on tires. (Various excise tax rates were increased as a part of a general increasein taxes during the World War II period.) There were no rate changes in 1943. However, theRevenue Act of 1943 (8) redefined rubber to include synthetic and substitute rubber and later the rates were codified in theInternal Revenue Code of 1954. (9)

The Federal-Aid Highway Act of 1956 (10) provided for a significant expansion of the federal-aid highwayprogram and authorized federal funding over a longer period of time so as to permit long-rangeplanning. It was considered necessary to authorize the entire Interstate Highway program to assureorderly planning and completion of this network of highways throughout the United States asefficiently and as economically as possible. In the case of tire taxes, the act raised certain rates andexpanded the rate structure by prescribing different rates for different tire types. Tires for highwayvehicles were taxed at 8 cents per pound, other tires at 5 cents per pound, inner tubes at 9 cents perpound, and tread rubber at 3 cents per pound. From that time forward, proceeds from tire excisetaxes have been transferred to the Highway Trust Fund established by that act. The act provided fora rate reduction in 1972, which was rescheduled because the interstate highway system was stillunder construction.

In 1960, an act called Excise Tax: Laminated Tires (11) provided a lower tax rateof 1 cent per pound for laminated tires which "consist wholly of scrap rubber" and "not of the typeused on highway vehicles." Congress recognized that the very heavy weight of laminated tiresdisadvantaged this new small industry since the tax represented nearly 20% of the retail cost of thetire.

The excise tax rates on tires were once again changed in 1961. (12) This time the Federal-AidHighway Act of 1961 (13) provided excise tax rate increases to 10 cents per pound for highway vehicle tires (up 2 cents perpound); 10 cents per pound for inner tubes (up 1 cent per pound); and 5 cents per pound of treadrubber (up 2 cents per pound). Rates of 5 cents per pound for other than laminated and 1 cent forlaminated 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 scheduledrate 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 thenational highway system.

A reduction in the rate of the tire excise tax of 2.5% was part of the Determination of SecondTier Taxes enacted in 1980. (15) The provision reduced the tax rate applicable to new highwaytires to 9.75 cents per pound and for non-highway tires to 4.875 cents per pound. The law alsophased out credits and refunds of tire excise taxes made pursuant to a warranty or guarantee after1982. The purpose of making these changes was to simplify collection procedures withoutsignificantly affecting overall tax receipts.

In an effort to stimulate job creation, the Congress passed the Surface TransportationAssistance Act of 1982. (16) One of its goals (besides increased revenues for construction andmaintenance of the Nation's highways) was a redistribution of highway costs between car and truckusers. 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 onnonhighway and laminated tires. A new tax structure for heavy tires with graduated excise tax ratesdependent on tire weight was established. Tires which weigh less than 40 pounds were exemptedfrom excise tax so that tires for most passenger cars are no longer taxable. The excise tax rates onheavy tires ranged from 15 to 90 cents a pound according to the weight of the tire. These rates areshown in the following table.

Table 1. Excise Tax Rates on Tires Under the SurfaceTransportation Assistance Act of 1982

Source: H.Rept. 97-987, pp. 89, 184.

Included in the Tax Reform Act of 1984 (17) were minorrefund provisions for tire stock and tread rubber floor stock. These provisionsadjusted for taxes previously paid on dealer stock that had not yet been sold. From1982 through the end of 2004, excise tax rates were not changed but various tax actswhich have extended the interstate highway system have also extended the tire excisetaxes.

An indirect change occurred to the federal tire excise tax under the TaxpayerRelief Act of 1997. The modification made by the act was in response to disputesoccurring during tax audits. The tire excise tax is based on weight rather than as atax on the retail selling price (18) In addition to the federal tax on tires, there is afederal retail excise tax (12%) imposed on heavy highway trucks, trailers, andtractors. Since the tires were taxed separately, the tires' retail sales value was notbeing included in determining the federal retail excise tax on heavy vehicles. Underthe act, the value of tires was to be included in determining the federal retail salestax. However, a credit for the amount of tire excise taxes paid was allowed againstthe retail sales tax on heavy highway vehicles. The change was effective as ofJanuary 1, 1998. The Joint Tax Committee estimated that this change would increasefederal revenues by $452 million during the FY1997-2002 period and $979 millionduring the FY1997-2007 period. (19) The excise tax on tires was last extended underthe Surface Transportation Revenue Act of 1998. (20)

The American Jobs Creation Act of 2004 (21) changed themethod of taxing tires from the graduated weight structure of prior law to a tax basedon the load capacity of the tire. (22) The tax is set at the rate of 9.45 cents for each10 pounds of tire load capacity in excess of 3,500 pounds. In the case of super singleor bias ply tires the tax rate is set at 4.725 cents for each 10 pounds tire load capacityin excess of 3,500 pounds. This change has been scored by the Joint Committee onTaxation as having a negligible impact on federal revenues. It was argued that thelower rate on super single or bias ply tires is justified since bias ply tires do not lastas long and therefore must be replaced more frequently than radial tires. We areunaware of any studies which support or rebut this assertion. However, it is reportedthat bias ply tires are used to a greater extent on construction and farm equipmentvehicles. Thus, while tires on these vehicles may carry the same heavy loads asradial tires, they often travel less frequently and for shorter distances on highwaysand thoroughfares which are supported by the tire tax. The American Jobs CreationAct of 2004 also provided that tires sold for the exclusive use of the Department ofDefense or the Coast Guard would be exempt from the tax. A former exemption fortires with an internal wire fastening agent was repealed from the law. (23)

A provision included in the Energy Tax Incentives Act of 2005 clarifies thedefinition of super single tires. Super single tires are those with a width greater than13 inches. They are "designed to replace two tires in a dual fitment" and are subjectto a lower tax rate of 4.725 cents for each 10 pounds load capacity exceeding 3,500pounds. Under the clarification, a super single tire does not include tires designedto 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 CreationAct of 2004. The revenue effect was scored as being negligible. Also included inthis legislation is a requirement that the Internal Revenue Service collect revenuedata for each class of taxable tire beginning January 1, 2006. This report is to includerevenue collections made from the tire taxes prior to the change in taxing loadcapacity. 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 furtherextension.

Recent Developments

Congress continues to consider highway reauthorization proposals in the 109thCongress. While the highway, public transit and road safety projects funding levelsexpire on May 31, 2005, the federal excise tax on tires does not expire untilSeptember 30, 2005. The House of Representatives approved a $283.9 billion billentitled the Transportation Equity Act: A Legacy for Users ( H.R. 3 ) ina 417 to 9 vote on March 10, 2005. That legislation includes an extension of the tiretax 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) ina vote of 89 to 11 on May 17, 2005. The Senate's version of the bill adds $11.2billion in additional revenues all of which is fully offset. It is argued that thisadditional revenue is needed so that all states will receive as much in federal highwayaid 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 thePresident in his FY2005 budget. The President's senior advisors have recommendedthat he veto the legislation if his net funding authorization level ($283.9 billion oversix years) is not met. (24)

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 loadcapacity rather than the sales price of tires. At the time of World War II, there simplywere no substitutes for rubber and no domestic rubber supply. Since rubber was anecessary commodity for the war effort, the imposition of this excise tax was usedas a means to discourage domestic consumption. As such, the person using morerubber -- and heavier tires -- would shoulder a heavier tax burden than those personsconserving the valuable commodity.

In this manner, two objectives were accomplished. First, the purchaser wouldpurchase tires with less rubber content and manufacturers were provided with anincentive to find alternate means of making tires with less rubber or with othersubstitutes. Synthetic tires were brought on the market shortly after this time. Ironically, an excise tax was placed upon these synthetic tires because the revenueneeds of the country were still the primary motive for the excise tax on tires andtubes.

The second reason for basing the tax on weight or load capacity is that it isa manufacturer's excise tax that is assumed to be passed forward to the eventualconsumer. Administratively, the tax is much easier to collect from a fewmanufacturers 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 takespossession of the tire. Because of sales, trade-ins, etc., the tax would be moredifficult to monitor and the number of firms collecting and, thus, remitting revenuesto the Internal Revenue Service (IRS) would be much greater, resulting in greateradministrative collection expense for IRS.

The proposed change from a weight based tax to a tax based on load capacitydoes not change the collection point of this manufacturers tax. As such, it should notaffect the number of collection points. Thus, it is generally believed that it shouldnot greatly affect the collection process.

Assessment

Because it funds highway construction, the excise tax on truck tires is oftenreferred to as a "user tax." It is generally held that heavier vehicles such as truckscause greater damage to both roadways and bridges. Thus, the tax on heavy tires fortrucks resembles a pricing mechanism with the tax viewed as a proxy for highwaywear-and-tear charges. While these taxes now apply only to heavy tires, they stillproduce 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 othersources in order to provide equivalent amounts of income for the Highway TrustFund. 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 ofthis excise tax. First, excise taxes have traditionally been associated with luxuryitems. Early in this century, those owning automobiles (and thus, needing tires) weregenerally wealthy individuals. In contrast, in the modern economy, tires play a vitaland necessary role in the overall transportation system and are no longer thought ofas luxuries. Second, selective excise taxes discriminate against industries whoseproducts are taxed. In this case, the commercial trucking industry must pay thisexcise tax while the chief competitors of truck transportation, namely the railroadsand waterways, have no corresponding excise tax. Thus, a question of intermodalequity arises. Finally, as noted earlier, excise taxes have their greatest impact onlower income individuals and are not based on the ability-to-pay principal. To theextent 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 withlower incomes tend to spend a larger portion of their income on these goods incontrast to individuals with higher incomes.

Revenues

As noted, revenues collected from the federal excise tax on tires are dedicatedto the Highway Trust Fund. The table (appearing on the following page) providesan historical review of those revenue collections. Early years include tax receiptscollected from the excise tax on inner tubes and tread rubber as well as the tax ontires. Today, revenues from the excise tax on tires provide less than 2% of theHighway Trust Fund receipts.

Table 2. Excise Tax Collections on Tires, Tubes, and Tread Rubber

(in nominal dollars)

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 thefiscal 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 theState of the Finances for FY1979.

For fiscal years 1980 to 1987, collection figures have been derived fromappropriate Annual Reports of the Commissioner of Internal Revenue published bythe Department of the Treasury, Internal Revenue Service, Publication 55.

For fiscal years 1988 to 1992, collection figures have been derived fromappropriate information releases entitled Internal Revenue Report of Excise Taxes .

For fiscal years 1993 to 1999, collection figures have been taken from theInternal 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 theInternal Revenue Service Statistics of Income Bulletin , v. 24, no. 3, Winter2004-2005. p. 152.