Sylvie Willis
Fuel tax, also known as a petrol, gasoline, or gas tax, is an excise tax imposed on the sale of fuel. The tax rate varies across different countries, with the Netherlands having the highest gasoline excise tax in the OECD at $3.36 per gallon, while the US has a rate of $0.184 per gallon. In 2022, global fossil fuel subsidies were $7 trillion or 7.1% of global GDP, with undercharging for environmental costs and forgone consumption taxes accounting for the majority of this amount. The revenue generated by fuel taxes is often used for transportation projects or as a source of general revenue, and can also be used to promote ecological sustainability.
| Characteristics | Values |
|---|---|
| Fuel tax rate in the US | 19 cents per liter |
| Fuel tax rate in Western European countries | $1.19 per liter |
| Fuel tax rate in Australia | A$0.412 per litre for petrol and ultra-low sulphur diesel |
| Fuel tax rate in India | Varies by state, but approximately 50% - 60% of the pump cost goes to the government in the form of different taxes |
| Fuel tax rate in Canada | Varies by locale, with combined excise taxes ranging from 16.2 ¢/L in the Yukon to 30.5 ¢/L in Vancouver |
| Global fossil fuel subsidies in 2022 | $7 trillion or 7.1% of GDP |
| Expected fossil fuel subsidies in 2030 | $8.2 trillion |
| Revenue gains from full price reform in 2030 | $4.4 trillion or 3.6% of global GDP |
| Revenue gains from partial price reform | About two-thirds of the revenue gain from full price reform |
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What You'll Learn
State and local fuel tax revenue
The federal excise tax on gasoline is 18.4 cents per gallon, and 24.4 cents per gallon for diesel fuel. On average, as of April 2019, state and local taxes and fees added 34.24 cents to gasoline and 35.89 cents to diesel, for a total US volume-weighted average fuel tax of 52.64 cents per gallon for gas and 60.29 cents per gallon for diesel.
State fuel taxes have undergone many revisions since their creation. While most fuel taxes were initially levied as a fixed number of cents per gallon, as of 2016, 19 states and the District of Columbia have fuel taxes with rates that vary alongside changes in the price of fuel, inflation, vehicle fuel economy, or other factors. For instance, in 2013, Maryland raised its gas tax rate to 27 cents and tied future increases to the consumer price index. As a result, the state's per-gallon tax rate has increased by roughly 15 cents since then.
In 2021, state and local motor fuel tax revenue accounted for 26% of highway and road spending, with toll facilities providing another 8%. Additionally, states earmark most of their motor fuel tax revenue for transportation spending.
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Federal fuel tax revenue
Federal fuel taxes in the United States are levied on gasoline, diesel, and other special fuels. The federal motor fuel tax on gasoline is 18.3 cents per gallon, while it is 24.3 cents per gallon for diesel fuel. These rates have not changed since 1993, and the revenue generated goes towards funding transportation infrastructure projects. In Fiscal Year 2016, federal fuel taxes generated $36.4 billion in revenue, with $26.1 billion from gasoline taxes and $10.3 billion from diesel and special motor fuel taxes.
The federal fuel tax plays a crucial role in funding highway and bridge construction, with approximately 60 percent of the tax revenue allocated for this purpose. The remaining 40 percent is directed towards earmarked programs, including a portion dedicated to mass transit projects. However, critics argue that a significant portion of the revenue is diverted to unrelated government programs and debt servicing.
Some states have started experimenting with alternative methods of generating transportation revenue, such as Oregon and Utah, which are piloting programs that tax drivers based on vehicle miles traveled (VMT) instead of fuel purchased. This approach aims to provide a more stable tax base as the number of hybrid and electric vehicles on the roads increases. Additionally, states are increasingly using toll roads to generate revenue for infrastructure projects, with state and local governments collecting $19.1 billion in toll highway charges in 2020.
While the federal fuel tax rate has remained unchanged for decades, inflation has significantly impacted its purchasing power. Between 1993 and 2017, total inflation reached up to 77 percent, depending on the source. As a result, some policymakers and advisors advocate for an increased tax rate to sustain transportation infrastructure funding. However, there are opposing views, with critics arguing that higher fuel costs would encourage reduced consumption and a subsequent decrease in tax revenue.
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Fuel tax and inflation
Fuel tax is an excise tax imposed on the sale of fuel, usually for transportation. In some countries, fuel tax is used to promote ecological sustainability. In the US, the federal excise tax rate on traditional motor fuels has been set at 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel since 1993. However, these rates are not adjusted for inflation, and there have been calls to increase the federal gas tax and index it to inflation.
Indexing fuel tax to inflation means that the tax rate increases automatically as the inflation rate rises. This can be done by setting the tax rate as a percentage of the inflation rate or by regularly adjusting the tax rate based on changes in the inflation rate. The advantage of indexing fuel tax to inflation is that it ensures that the real value of the tax revenue remains constant over time. This can be important for funding infrastructure projects or other government programs that rely on fuel tax revenue.
However, there are also arguments against indexing fuel tax to inflation. One concern is that it could make fuel less affordable for consumers, especially those with low incomes. In addition, there is no guarantee that higher fuel taxes will result in better roads or other infrastructure projects. In fact, some states with higher fuel taxes have poorer-quality roads than states with lower fuel taxes.
Another issue is that indexing fuel tax to inflation could reduce political accountability. If fuel taxes automatically increase with inflation, politicians may no longer need to explain to their constituents why their taxes have gone up. This could reduce transparency and make it easier for governments to avoid taking responsibility for unpopular policies.
Overall, the debate around fuel tax and inflation is complex and involves a range of economic, social, and political factors. While indexing fuel tax to inflation may help to maintain the real value of tax revenue, it could also have negative consequences for consumers and reduce political accountability. Therefore, it is important for policymakers to carefully consider the potential impacts of any changes to fuel tax policy.
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Fuel tax and government spending
Fuel tax is an excise tax imposed on the sale of fuel, usually for transportation. The tax rates vary widely across the world, from 19 cents per litre in the United States to an average of $1.19 per litre in Western Europe. In some countries, the tax is imposed at a national level, while in others, it varies between states or provinces. For example, in Canada, the federal government and some provincial governments collect sales tax (GST and PST) in addition to the retail price and excise taxes. Similarly, in India, fuel pricing varies by state, but central government taxes make up nearly half of the pump price.
The revenue generated from fuel taxes is used differently by different governments. In some cases, the revenue is dedicated to transportation projects, effectively making the tax a user fee. In other cases, the revenue is used for general government spending or infrastructure projects. For instance, in the United States, fuel tax receipts are often used for highway repair and maintenance. On the other hand, the Netherlands, which has the highest gasoline excise tax in the OECD, uses only a small fraction of the revenue for roads, allocating the rest for other government spending.
Fuel taxes have been proposed as a way to address carbon emissions in the transport sector, which accounts for about 25% of global fossil carbon emissions. Raising fuel taxes could significantly reduce emissions of greenhouse gases and other pollution from the transport sector. However, one of the main arguments against raising fuel taxes is the perception that they are regressive, disproportionately affecting those with lower incomes. Nevertheless, recent research suggests that this may not be the case, particularly in developing countries.
Instead of raising fuel taxes, some countries provide fossil fuel subsidies to keep prices low for consumers. In 2022, global fossil fuel subsidies were $7 trillion or 7.1% of global GDP, with the largest price gaps for coal, followed by diesel and gasoline. These subsidies are expected to decline in the near term as energy price support policies are reversed. Removing subsidies and using the revenue for better targeted social spending and productive investments can promote sustainable and equitable outcomes.
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Fuel tax and revenue distribution
Fuel tax is an excise tax imposed on the sale of fuel, typically intended for transportation. The revenue generated from fuel taxes is used differently in various countries. In some countries, the revenue is dedicated to transportation projects, while in others, it is considered a source of general revenue. Fuel tax can also be used as an ecotax to promote ecological sustainability.
In the United States, fuel tax revenues are collected by both state and local governments. In 2021, state and local governments collected a combined $53 billion in revenue from motor fuel taxes, which accounted for 1.3% of general revenue. However, the revenue from fuel taxes has not kept up with inflation and construction costs, leading to transportation funding gaps in many states. To address this, some states have increased their gas tax rates, while others have explored alternative revenue streams such as toll roads and vehicle miles traveled (VMT) taxes.
In Canada, fuel taxes can vary significantly between locales. On average, about one-third of the total price of gas at the pump is tax. Excise taxes on gasoline and diesel are collected by both federal and provincial governments, as well as by some municipalities. The federal government and certain provincial governments also collect sales tax on top of the retail price and excise taxes.
In India, the pricing of fuel varies by state, but central government taxes make up nearly half of the pump price. The central government taxes amount to about 10-20% of the final cost, while state taxes vary but average around 17-20%. As a result, approximately 50-60% of the pump cost goes to the government in the form of different taxes.
In other countries, such as Germany, Israel, and the Netherlands, fuel taxes are levied per litre and include both direct fuel tax and Value Added Tax (VAT). For example, in Germany, the fuel tax rate for ultra-low sulphur diesel was €0.4704 per litre in December 2019, plus a 19% VAT on the fuel itself and the fuel tax. Similarly, in Israel, the tax on fuel is $1.35 USD per litre, including direct fuel tax and VAT, totalling 78% of the total pump price.
While fuel taxes are a significant source of revenue for governments, they are often considered regressive taxes. Additionally, global fossil fuel subsidies were estimated at $7 trillion or 7.1% of GDP in 2022, reflecting a $2 trillion increase since 2020. Removing these subsidies and reforming fuel prices could result in significant revenue gains, estimated at $4.4 trillion or 3.6% of global GDP in 2030.
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Frequently asked questions
In India, the pricing of fuel varies by state, and central taxes make up nearly half of the pump price of fuel. As of February 18, 2021, the price of petrol in Delhi was ₹89.54 (US$1.10) per litre, of which ₹52.30 (62¢ US) was collected in various taxes, accounting for around 58% of the total price.
The US fuel tax rate varies by state, ranging from 19 cents per litre to $0.56 per gallon in 2017. The federal government levies a $0.184 per gallon tax on gasoline, while state and local governments levy an average additional tax of $0.34 per gallon.
Since October 2018, the fuel tax in Australia has been A$0.412 per litre for petrol and ultra-low sulphur diesel, with an additional Goods and Services Tax (GST) on top of the fuel tax.
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