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 (DC) tie at least a portion of their motor fuel tax rate to the price of gasoline (wholesale or at the pump) or 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 $44 billion in revenue from motor fuel taxes in 2015, or 1.5 percent of general revenue. Nearly all of this revenue (97 percent) came from state motor fuel taxes.
All states tax motor fuels. In 2017, per gallon gas tax rates ranged from 8.95 cents in Alaska to 58.2 cents in Pennsylvania. (For diesel and gasohol rates see our full table of state motor fuel tax rates). In addition to Alaska, 10 other states (Alabama, Arizona, Hawaii, Indiana, Mississippi, Missouri, New Mexico, Oklahoma, South Carolina, and Virginia) have per gallon rates below 20 cents. After Pennsylvania, the next-highest per gallon rates are in Washington (49.4 cents) and New Jersey (37.1 cents).
In 2016, New Jersey had the second-lowest rate (14.5 cents), but the state raised its rate as part of a larger tax bill. In 2017, California, Indiana, Montana, South Carolina, Tennessee, and West Virginia raised their gas tax rate (changes are not reflected in the map).
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 declined and automobile fuel economy standards increased. Consequently, aggregate gasoline consumption was at a peak in 2007and 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 (there was no action in 2010, 2011, or 2012), which is why inflation-adjusted state and local motor fuel tax revenue was higher in 2007 ($44 billion) than in 2014 ($43 billion). Since 2013, however, 26 states and DC have enacted legislation that will increase their gas tax.
States earmark most of their motor fuel tax revenue for transportation spending. And although gasoline consumption has decreased, construction costs and demand for transportation project spending has not. This has left many states with transportation funding gaps.
States have considered a few options to fix this problem:
- Raise the gas tax rate. States can compensate for the decline in gasoline consumption by raising the per gallon tax rate. In 2015, for example, Iowa raised its per gallon rate from 20 cents to 30 cents. Although increasing the rate with legislation is simple, it is also politically difficult, and that is in part why more than 20 states have gone more than decade without an increase at the start of the year.
- Tie the gas tax rate to the price of gasoline. Fifteen states and DC 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 energy cost 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 increased roughly 7 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. 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.
Reforming State Gas Taxes; How States Are (and Are Not) Addressing an Eroding Tax Base
Richard C. Auxier (2014)