Motor Fuel Taxes
Motor fuel taxes are taxes levied on gasoline, diesel, and gasohol (a mix of ethanol and unleaded gasoline).
Most states levy per unit taxes based on how many gallons of gasoline a consumer purchases. 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 $47 billion in revenue from motor fuel taxes in 2017, 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 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, New Mexico, and Virginia. After Pennsylvania, the next-highest per gallon tax rates are in California (53.3 cents), Washington (49.4 cents), and New Jersey (41.4 cents). These rates include the state's excise tax on gas plus any related taxes and fees the consumer pays at the pump—such as (if applicable) a geneal sales tax, an environmental fee, or an inspection fee.
State tax rates on gasohol are the same as tax rates on gas in every state except Iowa, Missouri, 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, higher in 20 states, and lower in seven 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 decade, 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 ($44.7 billion) than it was in 2014 ($44.3 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.
However, in recent years, most states made changes to their gas tax. Between 2013 to 2019, 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. 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. Twelve 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 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 instead calculate its gas tax rate based on population and inflation growth.
- 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 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. Some states are now experimenting with other gas tax formulas that would have similar effects. For example, North Carolina uses inflation and population adjustments, while Georgia uses inflation and fuel-efficiency standards.
- 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 $17.9 billion in toll highway charges in 2017.
- 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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