What Is Luxury Tax: History, Calculation, and Sports

A luxury tax is an extra charge added to goods or services considered non-essential — things bought with discretionary wealth rather than for daily need. In the United States, the federal government once imposed a broad luxury tax on expensive cars, boats, aircraft, jewelry, and furs, but most of those levies were repealed by the mid-1990s. Today the closest active federal equivalent is the Gas Guzzler Tax on fuel-inefficient passenger cars. The term also describes the payroll penalties that some professional sports leagues charge teams that spend above a set threshold.

The 1990 Federal Luxury Tax and Why It Ended

Congress created a broad luxury excise tax as part of the Omnibus Budget Reconciliation Act of 1990. Beginning January 1, 1991, buyers paid a 10 percent tax on the portion of a purchase price that exceeded set dollar thresholds for five categories of goods:¹

Passenger cars over $30,000
Boats over $100,000
Aircraft over $250,000
Jewelry over $10,000
Furs over $10,000

The tax was meant to raise revenue from wealthy consumers, but it hit the industries making those goods harder than expected. Luxury boat sales fell roughly 64 percent from pre-tax levels, though the 1990–91 recession made it hard to isolate the tax’s specific effect. Aircraft collections were minimal, totaling about $65,000 in the first two fiscal quarters after the tax took effect, because most expensive planes qualified for business-use exemptions.¹

Congress repealed the taxes on boats, aircraft, jewelry, and furs in 1993. The tax on passenger cars lasted longer at gradually reduced rates before expiring in 2002. No broad federal luxury excise tax has replaced it. Some state and local governments still add surcharges on high-value vehicles or other luxury items, but the rates and thresholds vary.

The Gas Guzzler Tax: The Closest Federal Equivalent Today

The main active federal levy resembling a luxury tax is the Gas Guzzler Tax, created by the Energy Tax Act of 1978 and codified at 26 U.S.C. § 4064. Rather than target a product’s price, this tax penalizes poor fuel economy. Any passenger car rated below 22.5 miles per gallon triggers the tax, and the amount rises as efficiency falls.²

The tax is a fixed dollar amount tied to the vehicle’s fuel-economy bracket:

21.5 to under 22.5 mpg: $1,000
20.5 to under 21.5 mpg: $1,300
19.5 to under 20.5 mpg: $1,700
18.5 to under 19.5 mpg: $2,100
17.5 to under 18.5 mpg: $2,600
16.5 to under 17.5 mpg: $3,000
15.5 to under 16.5 mpg: $3,700
14.5 to under 15.5 mpg: $4,500
13.5 to under 14.5 mpg: $5,400
12.5 to under 13.5 mpg: $6,400
Under 12.5 mpg: $7,700

Manufacturers and importers pay the Gas Guzzler Tax, not individual buyers at the dealership, though the cost is generally passed through in the vehicle’s sticker price.²

The tax applies only to passenger cars. Trucks, minivans, and sport utility vehicles are exempt, because they were not classified as passenger automobiles when Congress created the tax in 1978 and were rarely used for non-commercial purposes at that time.³ Under the statute, an “automobile” is a four-wheeled, fuel-powered vehicle designed for public roads and rated at 6,000 pounds unloaded gross vehicle weight or less. Anything above that weight falls outside the definition entirely.² Emergency vehicles are also exempt, including ambulances, law enforcement vehicles used by federal, state, or local governments, and fire trucks.⁴

How Luxury Taxes Are Usually Calculated

Where luxury taxes apply, they typically use a threshold system. The tax is charged only on the portion of a purchase price that exceeds a set dollar limit, not on the full price. Under the 1990 federal luxury tax, a car selling for $40,000 was taxed on the $10,000 above the $30,000 threshold. At the 10 percent rate, the buyer owed $1,000 in luxury tax rather than $4,000 on the full price.¹

This threshold approach keeps moderately priced versions of the same product tax-free while targeting only the most expensive purchases. The same idea appears in the sports context, where teams pay penalties only on payroll dollars above the cap, not on their entire payroll.

The Gas Guzzler Tax works differently. Instead of a percentage on price above a threshold, it charges a flat dollar amount based on the fuel-economy bracket. A car rated at 15 mpg pays the same $3,700 tax whether it costs $40,000 or $400,000.²

Luxury Tax in Professional Sports

Professional sports leagues use their own version of the luxury tax to promote competitive balance. Teams that spend more than a collectively bargained payroll threshold face financial penalties, which discourages wealthy franchises from vastly outspending their competitors. The details vary by league, and two major leagues don’t use a luxury tax at all.

Major League Baseball

MLB’s version is formally called the Competitive Balance Tax. Under the 2022–26 collective bargaining agreement, the payroll threshold rises each year, reaching $244 million for the 2026 season.⁵ Teams over the threshold pay a percentage on every dollar of the overage, at rates that climb for repeat offenders:

First year over the threshold: 20 percent on the overage
Second consecutive year: 30 percent
Third consecutive year or more: 50 percent

These escalating rates give teams a financial reason to stay under the threshold, or at least to avoid consecutive years of overspending.⁵

National Basketball Association

The NBA uses a more layered system. For the 2025–26 season, the salary cap is set at approximately $154.6 million. Above the cap, the league sets a luxury tax line, a first apron at roughly $195.9 million, and a second apron at about $207.8 million.⁶

Teams that exceed the luxury tax line pay an incremental tax that begins at $1.50 per dollar over the threshold in the first $5 million bracket and climbs in additional $5 million bands. Repeat taxpayers, meaning teams that paid the tax in at least three of the previous four seasons, face steeper rates at every bracket. Crossing either apron also triggers roster-building restrictions on top of the tax bill.

NFL and NHL

Neither the NFL nor the NHL uses a luxury tax. Both leagues operate under hard salary caps, which are firm spending limits that teams cannot exceed. The NFL has operated under a salary cap since 1994, and the NHL adopted its hard cap after the 2004–05 lockout, tying team payrolls to a fixed percentage of league revenue.⁷ Under a hard cap, enforcement is a matter of roster compliance rather than financial penalty: a team simply cannot field players whose combined salaries would push payroll over the limit. Money collected from luxury tax systems in MLB and the NBA is often redistributed to smaller-market teams or used to fund league-wide player benefits, an outcome hard-cap leagues achieve instead through revenue-sharing agreements.

1
U.S. Government Accountability Office. Luxury Excise Tax Issues and Estimated Effects
2
Office of the Law Revision Counsel. 26 USC 4064 – Gas Guzzler Tax
3
U.S. Environmental Protection Agency. Gas Guzzler Tax
4
eCFR. Gas Guzzler Tax
5
MLB.com. Competitive Balance Tax
6
NBA.com. NBA Salary Cap Set for 2025-26 Season
7
Bureau of Labor Statistics. The Hockey Lockout of 2004-05