A gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.
Why Do We Have These Taxes?
The basic justification for gas tax policies (gasoline excise taxes) is what economists call the benefit principle of taxation. Simply stated, consumers of government services should pay in proportion to the benefit they obtain from those services.
Funds generated from a gas tax pay for related government services like road construction, maintenance, repair, and public transportation. Because these taxes connect drivers to the costs of road upkeep, they encourage efficient road use, which helps limit congestion and the wear and tear that comes from overuse.
However, the federal government and many states have not indexed their specific rates for inflation, leading the real value of gas tax revenue tofall behind infrastructure spendingneeds across the country. The federal gas tax has been set at 18.4 cents per gallon of gasoline since 1993. In real terms,the gas tax has lost almost half its valuesince its last adjustment in 1993 because it is not indexed for inflation.
Gas taxes also face a narrowing tax base, as the improvement in vehicles’ fuel usage along with the growth in sales of electric vehicles reduces the tax’s connection to vehicle-based externalities. An alternative to these taxes would be a tax on vehicle miles traveled (VMT) to ensure that those driving on the roads are paying for the roads.
Tax Holidays: Good or Bad Policy?
Gas prices soared in early 2022 because of inflation and Russia’s war against Ukraine, leading some policymakers to consider suspending the federal gastax to aid consumers (several governors also considered implementing state gas tax holidays). The Committee for a Responsible Federal Budgetestimatedit would cost roughly $20 billion to suspend the federal gas tax from March to December 2022. That’s almost half of the$43 billionin total revenue the Congressional Budget Office expects the Highway Trust Fund to raise in the next year; suspending the excise tax on diesel fuel would produce additional costs.
In the context of the economy, reducing or eliminating the gas tax could encourage more consumer use of gas and exacerbate inflation.
In general, tax holidays (including sales tax holidays) do not promote economic growth but instead complicate the tax code and weaken state and federal government revenue streams.
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FAQs
Use fuel taxes provide revenue for planning, constructing, and maintaining California's publicly funded roadways and public mass transit systems.
How much is gas taxed in the US? ›
How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel? Federal taxes include excises taxes of 18.3 cents per gallon on gasoline and 24.3 cents per gallon on diesel fuel, and a Leaking Underground Storage Tank fee of 0.1 cents per gallon on both fuels.
What is the gas tax principle? ›
Why Do We Have These Taxes? The basic justification for gas tax policies (gasoline excise taxes) is what economists call the benefit principle of taxation. Simply stated, consumers of government services should pay in proportion to the benefit they obtain from those services.
What is the tax on gasoline an example of? ›
The tax on gasoline is an example of : (b) a corrective tax, because this tax address the negative externalities linked with fossil fuel. The "Corrective-Tax", are defined as the taxes which are designed to correct or internalize the negative externalities associated with certain goods or activities.
How do gas taxes affect the economy? ›
Evidence on the Sales Impact of Fuel Economy Taxation. Provided that fuel economy tax policies do influence the price of vehicles, theory predicts that they will influence the relative market share of affected models and thereby change fleet fuel economy and ultimately gasoline consumption.
Who has highest gas tax in us? ›
California has the highest tax rate on gasoline in the United States. As of July 2023, the gas tax in California amounted to 77.9 U.S. cents per gallon. California has long been known as the state with the highest tax rates – and consequently some of the highest fuel prices in the country.
Who benefits from the gasoline tax? ›
Federal and state governments levy gas taxes to help pay for road infrastructure projects. The average state gas tax is about 32.26 cents a gallon, though they range from less than 9 cents to almost 78 cents a gallon.
What state has the cheapest gas? ›
Mississippi has the lowest price of gas, with an average of $3.12 per gallon of regular gas. Table with 4 columns and 5 rows.
What state has the lowest gas tax? ›
Alaska gas tax is $0.0895 per gallon, the lowest in the nation. Alaska's gas tax is primarily utilized to fund the state's transportation infrastructure, including the construction and maintenance of roads and bridges, which are vital for connectivity in the state's vast and often remote areas.
Who created the gas tax? ›
State taxes
The first US state to tax fuel was Oregon, introduced on February 25, 1919. It was a 1¢/gal tax. In the following decade, all of the US states (48 at the time), along with the District of Columbia, introduced a gasoline tax. By 1939, many states levied an average fuel tax of 3.8¢/gal (1¢/L).
A sin tax (also known as a sumptuary tax, or vice tax) is an excise tax specifically levied on certain goods deemed harmful to society and individuals, such as alcohol, tobacco, drugs, candies, soft drinks, fast foods, coffee, sugar, gambling, and p*rnography.
Why is gas tax regressive? ›
Gas taxes have become more regressive over time, partially because of environmentally-oriented technological change, although the share of expenditures on gas taxes declines with expenditures much less than the share of income spent on gas taxes declines with income.
What state has the highest taxes? ›
California has the highest individual income tax burden, while seven states (including Texas, Florida and Washington) have the lowest. Washington has the highest sales and excise tax burden, while New Hampshire has the lowest. Red states have a lower tax burden than blue states, on average.
What state has the highest gas prices? ›
Hawaii has the highest prices and Georgia has the lowest. Data as of May 24, 2023. Western and Pacific states face the most costly gas in the nation, as the seven states with the highest prices are California, Hawaii ($4.76), Washington ($4.62), Arizona ($4.60), Nevada ($4.24), Oregon ($4.19) and Utah ($4.08).
What state has the lowest tax on cigarettes? ›
Through December 31, 2023, the state excise tax on cigarettes ranges from $0.170 per pack in Missouri, to $5.350 per pack in New York. The federal tax remains at $1.010 per pack. Four states (Georgia, Missouri, North Carolina, and North Dakota) have an excise tax on cigarettes that is less than $0.500 per pack.
Will raising gas taxes benefit the environment? ›
To encourage more sustainable transportation habits, economists recommend higher gasoline taxes, which in theory should reduce fuel consumption, and higher fuel-efficiency requirements for new cars.
Is the gas tax tied to inflation? ›
For example, in California, beginning July 1, 2020, the gas tax is adjusted according to the state CPI. The first increase was based on the CPI increase from Nov. 1, 2017, to Nov. 1, 2019, and subsequent adjustments will occur annually and be added to the associated rate for that year.
Why is gasoline tax bad? ›
The gas tax is one of the most regressive taxes because it disproportionality negatively impacts lower-income residents. Gas taxes are a tax on a commodity that is a need not a luxury. The lower one's personal income, the larger percentage of that income is spent on gas.
Are consumers of gasoline helped or hurt by this tax why? ›
The consumers of gasoline are hurt by the tax because they get less gasoline at a higher price. d. Workers in the oil industry are hurt by the tax as well. With a lower quantity of gasoline being produced, some workers may lose their jobs.
