Regan Brown
Fuel tax, also known as a petrol, gasoline, or gas tax, is an excise tax imposed on the sale of fuel. In most countries, the fuel tax is imposed on fuels intended for transportation. Fuel tax is a significant source of revenue for governments, with state and local governments in the US collecting a combined $53 billion in revenue from motor fuel taxes in 2021. In the UK, fuel duty brought in £28 billion annually, while Vehicle Excise Duty (VED) generated £7 billion. Fuel tax rates vary across countries and even within countries, with some states or provinces imposing additional taxes. For instance, in the US, the federal gasoline tax is 18.4 cents per gallon, while state fuel taxes range from 8.95 cents in Alaska to 62.9 cents in California. Fuel taxes are often adjusted to promote specific goals, such as reducing pollution and global warming or generating revenue for infrastructure projects.
| Characteristics | Values |
|---|---|
| Fuel tax revenue in the US in 2021 | $53 billion |
| Fuel tax revenue in the UK in 2023/24 | £24.8 billion |
| Fuel tax revenue in Canada | Varies between locales |
| Fuel tax revenue in China | N/A |
| Fuel tax revenue in India | Central and state government taxes make up nearly half of petrol's pump price |
| Purpose of fuel tax revenue | Transportation spending, infrastructure projects, ecological sustainability, etc. |
| Types of fuel taxed | Gasoline, diesel, gasohol, aviation fuel, kerosene, biodiesel, bioethanol, etc. |
| Fuel tax rates | Vary across states and countries |
| Impact of electric vehicles on fuel tax revenue | Expected reduction in revenue due to the transition from petrol/diesel to electric vehicles |
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What You'll Learn
Fuel tax revenue in the UK
Fuel duties are levied on purchases of petrol, diesel, and other fuels. They represent a significant source of revenue for the UK government. In the 2023-24 fiscal year, the government revenue from fuel duties was approximately £24.83 billion, down from £25.1 billion in the previous financial year. Fuel duty revenue more than tripled between 1987 and 2010, remaining around £27-28 billion until 2019/20. The amount raised in 2020/21 was impacted by the COVID-19 pandemic, with revenues falling to £20.9 billion. In 2021/22, revenues rose to £25.9 billion, but fell again to £24.8 billion in 2023/24.
Fuel duty is levied per unit of fuel purchased and is included in the price paid for petrol, diesel, and other fuels. The headline rate on standard petrol and diesel is 52.95 pence per litre, frozen since 2011-12, with a temporary 5 pence cut introduced in 2022-23 and extended until 2025-26. This duty is also applied to biodiesel and bioethanol, while the rate for marked gas oil is 10.18 pence per litre, reflecting its use in agriculture and non-commercial purposes.
The UK government receives tax revenue from drivers of petrol and diesel cars through fuel duty and Vehicle Excise Duty (VED), also known as road tax. Combined, these sources contribute about 1.5% of the UK's GDP and account for around 4% of all tax revenue. However, with the transition to electric vehicles (EVs), the government faces a potential loss of £35 billion in tax revenue, as EVs are exempt from both fuel duty and VED.
To address this revenue gap, various solutions have been proposed, including taxing the electricity used to charge EVs, implementing road pricing or mileage-based charges, and introducing congestion charges or tolls. While these options may help replace lost revenue, the transition to electric vehicles will likely result in a significant decline in Treasury revenue from motoring taxation.
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Fuel tax rates in the US
State fuel tax rates differ significantly across the US. For example, California has the highest gas tax rate at 68.1 cents per gallon, while Alaska has the lowest at 8.95 cents per gallon. Some states, like California, Washington, and several northeastern states, have additional cap-and-trade carbon policies or low carbon fuel standards that further increase fuel prices.
Many states tie their fuel tax rates to variables such as inflation, fuel efficiency standards, population growth, or wholesale fuel prices. For instance, Maryland's gas tax rate is linked to the consumer price index, while California, the District of Columbia, Florida, Georgia, Illinois, Michigan, North Carolina, Utah, and Virginia consider inflation in their calculations.
The impact of electric vehicles and improving fuel efficiency has led some states to consider replacing fuel taxes with vehicle miles traveled (VMT) taxes, which would charge drivers based on actual miles driven rather than fuel consumed. Additionally, states like Washington and Oregon have implemented clean energy programs that indirectly increase fuel prices to encourage emission reductions.
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Fuel tax as a source of general revenue
Fuel tax, also known as a petrol, gasoline, or gas tax, is an excise tax imposed on the sale of fuel. While fuel tax is imposed on transportation fuels in most countries, it is considered a source of general revenue in others.
In the United States, the federal government imposes an excise tax on gasoline and diesel fuel, with proceeds partially supporting the Highway Trust Fund. As of 2023, the federal tax rate for gasoline is 18.4 cents per gallon, while it is 24.4 cents per gallon for diesel. State and local governments also levy taxes and fees on gasoline and diesel, resulting in a volume-weighted average fuel tax across the nation. For instance, California has one of the highest per-gallon tax rates in the country at 62.9 cents. In 2021, state and local motor fuel taxes generated a combined $53 billion in revenue, accounting for 1.3% of general revenue. To maintain revenue levels as gas consumption slows, some states have tied their tax rates to variables such as inflation, population growth, or fuel-efficiency standards.
In the United Kingdom, fuel duty is expected to generate £24.4 billion in 2025-26, contributing to about 2.0% of all receipts. The standard duty rate on petrol and diesel has been frozen at 52.95 pence per litre since 2011-12, with a temporary 5 pence cut introduced in 2022-23 and extended until 2025-26. The move towards electric vehicles (EVs) is expected to impact fuel duty revenue, with the Treasury facing the challenge of replacing the £35 billion contributed annually by drivers of petrol and diesel cars.
In other countries, fuel tax rates vary widely. For instance, China has witnessed significant increases in gasoline taxes, while India's fuel pricing includes central taxes that amount to about 10-20% of the final cost. Canada's fuel taxes differ across locales, with combined excise taxes ranging from 16.2 cents per litre in the Yukon to 30.5 cents per litre in Vancouver.
While fuel tax serves as a source of general revenue for governments, it is also advocated as a tool to promote ecological sustainability and reduce pollution. By increasing fuel taxes, governments can make petrol more expensive relative to alternative fuels, encouraging a shift towards environmentally friendly options. Additionally, the revenue generated from fuel taxes can be dedicated to transportation projects, effectively functioning as a user fee for road usage.
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Electric cars and fuel tax
Fuel tax, also known as petrol, gasoline, or gas tax, is an excise tax imposed on the sale of fuel. In most countries, fuel tax is imposed on fuels intended for transportation. In 2021, state and local governments in the US collected a combined $53 billion in revenue from motor fuel taxes, or 1.3% of general revenue. Nearly all of this motor fuel tax revenue (97%) came from state taxes. In the UK, Fuel Duty generated around £24.8 billion in 2023/24, down from £25.1 billion in the previous financial year.
However, the widespread adoption of electric vehicles (EVs) poses a significant challenge to fuel tax revenue. California, for instance, is witnessing a transition from gas and diesel vehicles to electric ones, which promises important climate benefits but also sets up a potential transportation revenue crisis. The state could lose more than $1 billion in fuel tax revenue by 2027, and by 2040, the amount of projected annual revenue collected could be $8.5 billion less than in 2024, a loss of 64%. This loss in revenue could impact critical maintenance of local streets, state highways, and public transit services.
To address this challenge, California has introduced a special vehicle registration fee on electric vehicles, known as the Road Improvement Fee (RIF). While RIF revenue is not enough to fully offset lost fuel tax revenue, it covers a substantial portion of the loss. Additionally, the state is exploring various tax and fee options, such as charging drivers by the mile driven or taxing the electricity used to power EVs. Other states, like Colorado, offer tax credits and incentives for the purchase or lease of EVs to encourage their adoption.
As the world moves towards electric cars and away from traditional fossil fuels, governments will need to develop innovative solutions to maintain and generate revenue streams that were once dependent on fuel taxes. This shift may involve a combination of new fees, taxes, and incentives to support the transition to a more sustainable future.
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Fuel tax and carbon pricing
Fuel tax is an excise tax imposed on the sale of fuel, usually transportation fuels. In the US, motor fuel taxes are levied on gasoline, diesel, and gasohol (a mixture of ethanol and unleaded gasoline). In 2021, state and local governments collected a combined $53 billion in revenue from motor fuel taxes, accounting for 1.3% of general revenue. In the UK, Fuel Duty revenue was about £24.8 billion in 2023/24, down from £25.1 billion in the previous financial year.
Fuel tax receipts are often dedicated to transportation projects and can be considered a user fee. They are also used to promote ecological sustainability, with higher taxes on fossil fuels making petrol just as expensive as more environmentally friendly fuels. Fuel taxes can be seen as an implicit form of carbon pricing.
Carbon pricing, such as a carbon tax, places a fee on fuels based on the amount of carbon dioxide they release when burned. The fee is usually set for each ton of greenhouse gas emissions. The price is typically set by the government, and as it increases, consumers may be incentivized to switch fuels or adopt new technologies to avoid paying the tax. Carbon pricing can be applied at any point in the energy supply chain, from "upstream" suppliers to "downstream" energy-using industries and households.
Carbon pricing programs often include mechanisms to address competitiveness concerns and protect domestic industries. Revenues from carbon pricing can be returned to consumers or reinvested in climate initiatives. However, lower-income households may be disproportionately impacted by increased energy costs.
In Canada, the Greenhouse Gas Pollution Pricing Act includes fuel charge rates for various fuel types. The rates are applied in dollars per cubic meter for natural gas and per litre for petroleum coke, with conversion factors provided to ensure consistency.
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Frequently asked questions
Fuel duty revenue in the UK has been around £24-28 billion in recent years. In 2023/24, it was £24.8 billion.
In the US, state and local governments collected a combined $53 billion in revenue from motor fuel taxes in 2021.
In Canada, excise taxes on fuel vary from locale to locale. In Vancouver, the combined excise tax is 30.5 ¢/L ($1.386/imperial gal).
Fuel tax in China has been a contentious issue, with the National People's Congress opposing the State Council's efforts to institute a fuel tax to finance the National Trunk Highway System.
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