	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. 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. 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 act provided fora rate reduction in 1972, which was rescheduled because the interstate highway system was stillunder construction. Thus, as the Highway Trust Fund was extended, so too were the excise taxes that financed thenational highway system. Excise Tax Rates on Tires Under the SurfaceTransportation Assistance Act of 1982 
Source: H.Rept. 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. (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. 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. The tire excise tax is currently scheduled to expire on October 1, 2011. 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. 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. 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. 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. 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.
The excise tax on tires was first levied in 1918 mainly because of revenue needs broughtabout by World War I. The tax was reduced after the war and then repealed in 1926. The levy wasreintroduced during the Great Depression at a time when federal individual income tax revenueswere plummeting and was increased to help finance World War II. A general reduction in rates wasin the offing just before the outbreak of the Korean conflict but revenue needs brought about by thatwar prevented the lowering of rates. More recent history shows that in 1956 the rate of the tax wasraised in response to legislation enacted to build the interstate highway system and to create theHighway Trust Fund. Scheduled reductions did not occur after the construction of the interstatehighway system had been extended. A goal of the Surface Transportation Assistance Act of 1982was to redistribute highway costs between car and truck users. At that time, the tax structure waschanged so that the tax was imposed only on heavy tires with tax rates that are graduated, andincreased along with the tire's weight. The Taxpayer Relief Act of 1997 repealed the exclusion ofthe 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 CreationAct of 2004 the tax based on tire weight was replaced with rates based on the load capacity of thetire. 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 damageto both roadways and bridges, and that the excise tax on tires resembles a pricing mechanism thatis a proxy for highway wear-and-tear charges. This premise still holds true as load capacity mustexceed 3,500 pounds before the tax is imposed, thus exempting tires on lighter vehicles. Tire excisetaxes still produce revenues for the Highway Trust Fund and repeal of the existing tax would requireadditional taxes to be imposed on other sources so as to provide an equivalent amount of revenuesto build and maintain roadways. This excise tax is said to be easy to administer with minimal federalcollection costs.
Several arguments are advanced against the imposition of the tire tax. First, some view thisselective excise tax as discriminating against the tire and related industries whose products are taxedand also the trucking industry, which depends on the product. The commercial truck transportationindustry pays this tax while competitors such as railroads and waterways have no correspondingexcise tax, thus creating an intermodal equity issue. Second, to the extent that the excise tax on tiresis passed forward into the cost of goods sold, it places a burden on lower income individuals sinceindividuals with lower incomes, relative to those with higher incomes, tend to spend a larger portionof their income for the same consumption amount (thus, to the extent that the tax is passed forwardto consumers, the tax is regressive).
This report will not be updated.