Motor Fuel Taxes
Motor fuel taxes are levied on gasoline, diesel, and gasohol (a mix of ethanol and unleaded gasoline).
Most states use per unit taxes—that is, consumers pay tax based on how many gallons of gasoline they purchase. However, 20 states and the District of Columbia tie at least a portion of their motor fuel tax rate to the price of gasoline (wholesale or at the pump) or some form of inflation (national or state).
- How much revenue do state and local governments raise from motor fuel taxes?
- How much do motor fuel tax rates differ across states?
- Why are some states considering reforming their gas tax?
- Further reading
State and local governments collected a combined $45 billion in revenue from motor fuel taxes in 2016, or 1.5 percent of general revenue. Nearly all of this revenue (97 percent) came from state motor fuel taxes.
In addition to the federal tax on motor fuels, all states and the District of Columbia also tax motor fuels. In 2019, per gallon gas tax rates ranged from 8.95 cents in Alaska to 57.6 cents in Pennsylvania (for diesel and gasohol rates see our full table of state motor fuel tax rates). In addition to Alaska, seven other states have per-gallon rates below 20 cents: Alabama, Arizona, Hawaii, Mississippi, Missouri, New Mexico, and Virginia). After Pennsylvania, the next-highest per gallon rates are Washington (49.4 cents), California (47.7 cents), and New Jersey (41.4 cents).
In most states the gas tax is a per unit tax: the consumer pays tax based on the number of gallons purchased rather than a percentage of the final purchase price. As a result, tax revenue increases only if drivers buy more gasoline or lawmakers raise the tax rate. During the past decade, the number of miles driven in the US stagnated and automobile fuel economy standards increased. Consequently, aggregate gasoline consumption was at a peak in 2007 and then declined for a few years. However, consumption has rebounded and is now roughly where it was a decade ago.
For most of the period, states did not respond to a flat or declining tax base with rate hikes, and as a result inflation-adjusted state and local motor fuel tax revenue was higher in 2007 ($44 billion) than it was in 2014 ($43 billion).
States earmark most of their motor fuel tax revenue for transportation spending. And while gasoline consumption was not increasing, construction costs and demand for transportation project spending was. This left many states with transportation funding gaps.
However, in the past five years, most states made changes to their gas tax. Between 2013 to 2018, 27 states and the District of Columbia enacted legislation that increased their gas tax. And Alabama, Arkansas, and Ohio approved gas tax increases in 2019 (as of April).
States have various options when increasing transportation funding, including:
- Raise the gas tax rate. States can compensate for the decline in gasoline consumption by raising the per gallon tax rate. In 2017, for example, Indiana raised its per gallon rate from 18 cents to 28 cents. Although increasing the rate with legislation is simple, it is often politically difficult. For example, Missouri’s legislature passed a gas tax hike in 2018 but it was defeated by voters in a corresponding ballot referendum that November.
- Tie the gas tax rate to the price of gasoline. Fourteen states and the District of Columbia tie at least a portion of their gas tax rate to the price of gasoline. This option helps raise revenue when the price of gasoline is high, but it is counterproductive when gasoline prices fall. For example, Kentucky and North Carolina, two states that had tied rates to prices, had two of the highest state gas tax rates when prices peaked a few years ago, but they had to scramble to make changes when prices dropped. As a result of the lower prices, Kentucky created a new rate “floor” to stem revenue losses, and North Carolina decided to stop using price and instead calculate its gas tax rate based on population and inflation starting in 2018.
- Tie the gas tax rate to inflation or population. In 2013, Maryland raised its gas tax rate to 27 cents and indexed future increases to the consumer price level. As a result, the state’s per gallon rate has increased 8 cents since then. The rate will continue to slowly increase as long as consumer prices go up. Michigan’s rate will also become tied to inflation in 2022. Massachusetts tied its rate to inflation in 2013, but the state’s voters repealed the reform in a 2014 ballot initiative. These automatic rate increases help states maintain gas tax revenue as the number of gallons purchased declines. Some states are now experimenting with other gas tax formulas that would have similar effects: North Carolina uses inflation and population, while Georgia uses inflation and fuel-efficiency standards.
- Use another revenue source. Many states now use toll roads, charging drivers a fee to use specific roads, to generate revenue for infrastructure projects. State and local governments collected 16.4 billion toll highway charges in 2016. Alternatively, in 2013, Virginia lowered its gas tax and increased its general sales tax from 5 percent to 5.3 percent (on all taxed goods) and dedicated the new revenues to transportation funding.
- Tax miles traveled instead of gasoline. Both California and Oregon are running pilot programs that tax certain driver’s vehicle miles traveled (VMT) instead of gasoline purchased. The US Department of Transportation is also providing funding for additional VMT studies in several other states. The hope is that VMT taxes will provide a more stable tax base as drivers continue purchasing more fuel-efficient cars. However, there are administrative challenges in measuring VMT, and governments would still need to set tax rates high enough to produce the desired amount of revenue.
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