Motor Fuel Taxes
Motor fuel taxes are taxes levied on gasoline, diesel, and gasohol (a mixture of ethanol and unleaded gasoline).
Most states levy per unit taxes based on how many gallons of gasoline a consumer purchases. However, 22 states and the District of Columbia tie at least a portion of their motor fuel tax rate to a variable such as the price of gasoline (wholesale or at the pump), inflation, or another metric (e.g., state population growth).
- 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 $50 billion in revenue from motor fuel taxes in 2018, or 1.5 percent of general revenue. (This exclude any revenue collected from general sales taxes levied on motor fuel purchases in addition to the motor fuel tax.) Nearly all motor fuel tax revenue (97 percent) came from state motor fuel taxes in 2018.
In addition to the 18.4 cents per gallon federal tax on motor fuels, all states and the District of Columbia tax motor fuels. Per gallon gas tax rates range from 8.95 cents in Alaska to 57.6 cents in Pennsylvania. In addition to Alaska, six other states have per gallon gas tax rates below 20 cents: Arizona, Hawaii, Mississippi, Missouri, and New Mexico. After Pennsylvania, the next-highest per gallon tax rates are in California (55.5 cents), New Jersey (50.7 cents), and Washington (49.4 cents). These rates include any state excise taxes on gas plus any related taxes and fees that the consumer pays at the pump, such as applicable environmental or inspection fees.
Ten states also levy a general sales tax or gross receipts tax on purchases of motor fuel. In California, the (prepaid) general sales tax is included in the state’s per gallon excise tax rate. In the other nine states, the general sales tax or gross receipts tax is levied as a separate tax on the purchase.
State tax rates on gasohol are the same as tax rates on gas in every state except Iowa, Missouri, Nevada, and South Dakota, where the rate on gasohol is slightly lower. State tax rates on diesel fuel are the same as the tax rates on gas in 23 states and the District of Columbia, higher in 20 states, and lower in seven states. For each state's tax rates on gas, diesel, and gasohol see our full table of state motor fuel tax rates.
In most states the gas tax is a per unit tax. That is, 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 two decades, Americans drove fewer miles and purchased more fuel-efficient vehicles. Consequently, aggregate gasoline consumption stagnated.
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 ($45.8 billion) than it was in 2014 ($45.4 billion).
States earmark most of their motor fuel tax revenue for transportation spending. And while gasoline consumption and thus tax revenue were not increasing, construction costs and demand for transportation project spending was. This left many states with transportation funding gaps.
(In 2018, state and local motor fuel tax revenue accounted for 27 percent of highway and road spending. Toll facilities and other street construction and repair fees provided another 12 percent, and the remaining 61 percent came from other sources.)
However, in recent years, most states made changes to their gas tax. Between 2013 to 2020, 31 states and the District of Columbia enacted legislation that increased their gas tax.
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.
- Tie the gas tax rate to the price of gasoline. Twelve states and the District of Columbia tie 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 previously tied a large share of their tax rates to gas prices. When gas prices peaked a few years ago these states had two of the highest gas tax rates in the country, but when prices dropped their legislatures had to scramble to prevent large revenue losses. Kentucky created a new tax rate "floor" and North Carolina decided to stop using price in their formula and now instead calculates its gas tax rate based on population and inflation growth. As a result, no state currently ties a large portion of their tax rate to the price of gasoline.
- 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 tax rate has increased roughly 10 cents since then. The rate will continue to slowly increase as long as consumer prices go up. These automatic rate increases help states maintain gas tax revenue as the number of gallons purchased declines. California, the District of Columbia, Florida, Georgia, Illinois, Michigan, North Carolina, Utah, and Virginia also use inflation in their gas tax rate calculations. Some states are also now experimenting with other gas tax rate formulas that would have similar effects. For example, North Carolina uses population growth and Georgia uses fuel-efficiency standards in their rate calculations.
- Use another revenue source. States are increasingly using toll roads, charging drivers a fee to use specific roads, to generate revenue for infrastructure projects. State and local governments collected $18.5 billion in toll highway charges in 2018, up from $10.5 billion in 2008 (in 2018 inflation-adjusted dollars). Thus, revenue from toll highway charges increased 76 percent, while gas tax revenues only increased 10 percent over that same period.
- Tax miles traveled instead of gasoline. Oregon and Utah are currently running pilot programs that tax certain drivers' 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.
Infrastructure, the Gas Tax, and Municipal Bonds
Richard C. Auxier and John Iselin (2017)
What Do Federal Taxes Have To Do With Your Public Transit?
Aravind Boddupalli and Erin Huffer (2020)
Reforming State Gas Taxes; How States Are (and Are Not) Addressing an Eroding Tax Base
Richard C. Auxier (2014)
Four Facts for Trump's Infrastructure Week
Richard C. Auxier (2017)