Mercedes Mullins
Fuel taxes are levied by governments at both the federal and state levels, and they apply to gasoline, diesel, and other special fuels. These taxes are used to fund highway repair and maintenance, as well as other government infrastructure projects. The amount of tax collected from fuel varies across different states and is influenced by factors such as the price of fuel, inflation, and population growth. In addition to federal and state taxes, local governments may also impose additional taxes or fees on fuel, such as toll roads or environmental taxes. Understanding the impact of these taxes on consumers and the environment is complex due to the dynamic nature of fuel prices and the variety of taxes involved.
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What You'll Learn
Federal and state fuel tax rates
Fuel tax rates vary across the United States, with state and local taxes and fees contributing to the overall tax burden on gasoline and other fuels. The first federal gasoline tax in the country was implemented on June 6, 1932, with a rate of 1 cent per gallon (0.3 cents per litre) under the Revenue Act of 1932. Since 1993, the federal gasoline tax rate has remained unchanged and is not adjusted for inflation, at 18.4 cents per gallon (4.86 cents per litre). This lack of adjustment has resulted in a significant erosion of the tax's value due to inflation, which stood at 113% from 1993 to 2023.
The federal excise tax on gasoline is currently 18.4 cents per gallon, while diesel fuel is taxed at 24.4 cents per gallon. Kerosene-based jet fuel is generally taxed at $0.244 per gallon, with reduced rates for non-commercial aviation refuelling taking place directly on airport premises or from qualified refuelling vehicles. State and local taxes further increase the overall tax burden, with California having the highest gas tax rate at 68.1 cents per gallon, followed by Illinois (66.5 cents) and Pennsylvania (58.7 cents). Alaska has the lowest gas tax rate at 8.95 cents per gallon.
The revenue generated from fuel taxes is utilised in various ways. Approximately 60% of federal gas taxes are directed towards highway and bridge construction, with the remaining 40% allocated to earmarked programmes, including mass transit projects. Additionally, revenues from aviation and jet fuel taxes primarily fund airport and Air Traffic Control operations through the Federal Aviation Administration (FAA).
The impact of environmental programs and policies, such as cap-and-trade systems and clean fuel initiatives, further complicates the determination of the exact tax burden on fuel. While these programs aim to reduce carbon emissions and promote clean energy, they can also influence fuel prices and tax rates. Some states with prominent environmental initiatives include Washington, Oregon, and several northeastern states.
The effectiveness of fuel taxes as a source of revenue for road infrastructure maintenance is being challenged by the increasing popularity of electric vehicles and improvements in fuel efficiency. As a result, some states are considering replacing fuel taxes with vehicle miles travelled (VMT) taxes, which would use actual miles driven as the basis for taxation instead of fuel consumption.
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State tax variability
State fuel taxes in the US vary widely across states and are levied in a few different ways, including sales taxes, excise taxes per gallon purchased at the pump, and taxes on wholesalers or retailers, which are generally passed on to consumers via increased prices. As of 2016, 19 states and the District of Columbia have fuel taxes with rates that vary alongside changes in the price of fuel, the inflation rate, vehicle fuel-economy, or other factors.
The state with the lowest tax rate on gasoline is Alaska, at 8.95 cents per gallon, followed by Mississippi (18.4 cents per gallon) and Hawaii (18.5 cents per gallon). In contrast, California has the highest tax rate on gasoline, at 68.1 cents per gallon, followed by Illinois (66.5 cents per gallon) and Pennsylvania (58.7 cents per gallon). These rates do not include the effects of cap-and-trade carbon policies or low carbon fuel standards, which further increase prices in California, Washington, and select northeastern states.
Some states are experimenting with alternative tax models. For example, Oregon and Utah are currently running pilot programs that tax certain drivers' vehicle miles travelled (VMT) instead of gasoline purchased. North Carolina uses population growth, and Georgia uses fuel-efficiency standards in their rate calculations. States are also increasingly using toll roads to generate revenue for infrastructure projects.
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Tax revenue usage
Fuel tax is imposed on the sale of fuels intended for transportation. In the United States, the federal excise tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel. This tax has not been adjusted since 1993 and is not indexed to inflation, which has increased by 111% from October 1933 to December 2023. This has resulted in a decline in the purchasing power of the fixed-rate gas tax.
The revenue generated from fuel taxes is used to fund various government services and projects. Firstly, it supports the Highway Trust Fund, contributing to highway and bridge construction, maintenance, and repair. According to a statement by then-Secretary of Transportation Mary Peters in 2007, about 60% of federal gas taxes are allocated for this purpose. Additionally, the remaining 40% of tax revenues are directed towards earmarked programs, including a minority allocated for mass transit projects.
State and local governments also collect substantial revenue from motor fuel taxes. In 2021, they accumulated a combined total of $53 billion in tax revenue, which accounted for 1.3% of their general revenue. The rates of state fuel taxes vary across the country, with California having the highest per-gallon tax rate at 62.9 cents, followed by Pennsylvania at 57.6 cents.
Some states are exploring alternative methods to generate revenue for infrastructure projects. For instance, states are increasingly adopting toll roads, where drivers are charged a fee to use specific roads. In 2020, state and local governments collected $19.1 billion in toll highway charges, a significant increase from the $8.3 billion collected in 2000.
Additionally, Oregon and Utah are piloting programs that tax drivers based on vehicle miles traveled (VMT) instead of the amount of gasoline purchased. This approach aims to provide a more stable tax base as the use of hybrid and electric vehicles increases.
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Sales tax
In the United States, the federal government and the states levy a variety of taxes on fuel, including sales taxes, excise taxes, and taxes on wholesalers or retailers. The US federal excise tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel. These rates have remained unchanged since 1993 and are not indexed to inflation, which increased by 111% from October 1993 to December 2023. On average, as of April 2019, state and local taxes and fees add 34.24 cents to gasoline and 35.89 cents to diesel, resulting in a total US volume-weighted average fuel tax of 52.64 cents per gallon for gasoline and 60.29 cents per gallon for diesel.
The wide variation in tax rates across the US is reflected in the range of gas tax rates for 2024, with California having the highest rate at 68.1 cents per gallon, followed by Illinois (66.5 cents per gallon) and Pennsylvania (58.7 cents per gallon). In contrast, Alaska has the lowest rate at 8.95 cents per gallon, followed by Mississippi (18.4 cents per gallon) and Hawaii (18.5 cents per gallon). These rates do not include the effects of cap-and-trade carbon policies or low carbon fuel standards, which further increase prices in certain states.
The revenue generated from fuel sales taxes is used to fund various government projects, including highway repair and maintenance, and other infrastructure initiatives. However, critics argue that a significant portion of the revenue is diverted to unrelated government programs and debt servicing. As electric vehicles become more prevalent and fuel efficiency improves, the effectiveness of gas taxes as a source of revenue for road maintenance diminishes.
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Tax on aviation fuel
Aviation fuel, also known as jet fuel or kerosene, is generally taxed at $0.244 per gallon. However, a reduced rate of $0.219 applies if the kerosene is loaded directly into an aircraft fuel tank from an on-airport terminal or a qualified refueler truck, tanker, or tank wagon. These taxes are paid by airline companies to the government for the jet fuel they burn.
In the United States, most states tax aviation gasoline (avgas). The FAA has implemented policies regarding the use of proceeds from aviation fuel taxes, with state and local taxes considered airport revenue and used for airport-related capital and operating costs.
Some countries in Europe, such as Belgium, Bulgaria, Denmark, France, Germany, Italy, Luxembourg, the Netherlands, and Sweden, have proposed or attempted to introduce aviation taxes to address the industry's emissions and pollution. These efforts aim to establish uniform air passenger taxes and kerosene taxes within the EU.
Aviation taxation can take various forms, including airport improvement fees, air passenger taxes, departure taxes, landing fees, and ticket levies based on distance and travel class. These taxes serve multiple purposes, such as mitigating the environmental impact of aviation, generating revenue for infrastructure projects, and supporting initiatives like the global health initiative Unitaid.
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Frequently asked questions
The federal tax on gasoline in the US is 18.4 cents per gallon and 24.4 cents per gallon for diesel fuel. This has not changed since 1993.
In 2021, state and local governments collected a combined $53 billion in revenue from motor fuel taxes, or 1.3% of general revenue.
Fuel taxes are levied in a few ways, including per-gallon excise taxes, excise taxes on wholesalers, and general sales taxes. These taxes, along with fees like underground storage tank fees, increase the price consumers pay at the pump.
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