How you react to fuel tax speaks volumes.
Urbanites with trains, busses and bike lanes at their feet may not mind gas tax as much as suburban and rural drivers deeply dependent on their vehicles. But roughly 45% of American households do not have access to public transportation (Wall Street Journal). The majority of Americans, approximately 76%, drive to work each day—and they notice every fuel tax flux.
Fuel suppliers, distributors and retailers also keenly feel the impact of fuel tax policy. Managing fuel tax compliance can be extremely complex, and getting it wrong can cut into margins and put companies at risk of penalties.
Fuel tax 101
Fuel tax is an excise tax, meaning that the rate is based per unit. That’s different than sales tax, which is based on a percentage of the sale price. (Watch Will’s Whiteboard on excise tax.) Sales tax revenue rises and falls with both the price and number of items sold. Excise tax revenue is dependent solely on the number of units sold; it is independent from price.
Fuel tax is charged at both the federal and state levels.
Federal fuel tax
President Herbert H. Hoover created the first federal gas tax during the Great Depression, part of a desperate attempt to balance an increasingly unbalanced budget. In addition to imposing new taxes on electricity, admissions and consumer products, the Revenue Act of 1932 instituted a 1 cent per gallon excise tax on gasoline sales.
Like most taxes, the federal gas tax has been controversial since its inception. It was made permanent by the Revenue Act of 1941, extended many times, and helped fund various war efforts. Yet not until 1956, when President Eisenhower signed the Federal-Aid Highway Act of 1956, was fuel tax revenue “reserved for use on the Interstate System and other highway projects.” (There have been exceptions to that rule, of course.)
In 1983, President Reagan created two separate accounts within the Highway Trust Fund: a Highway Account and a Mass Transit Account. In 1993, the federal tax on gasoline was set at 18.4 cents per gallon, where it remains:
- 15.44 cents fund the Highway Account
- 2.86 cents fund the Mass Transit Account
- 0.1 cent funds the Leaking Underground Storage Tank Trust Fund
The federal tax on gasohol is also 18.4 cents per gallon, while the tax on diesel fuel is 24.4 cents per gallon. Liquefied Petroleum Gas (LPG), Liquefied Natural Gas (LNG), M85 (85% methanol), and Compressed Natural Gas (CNG) are all taxed at different rates at the federal level (U.S. Department of Transportation, Federal Highway Administration).
State fuel tax
State fuel taxes predate the federal fuel tax. Oregon was the first state to venture into that territory, in 1919. The logic: cars use roads, cars should fund roads. By 1929, every state had a fuel tax. The tax helped create a “world-class highway system.”
Indeed, state revenue typically funds approximately 43% “of total surface transportation funding in the country.” That’s more than the federal revenue, which accounts for roughly 21%, and local revenue (about 36%) (AASHTO).
Yet even in the early years, states were using fuel tax revenue to fund programs unrelated to transportation. In 1938, for example, Nebraska “got more than half of its total revenue through ‘gas’ taxes….” In response to the recent recession, more states are using transportation funds to cover other needs. According to the Wall Street Journal, “Texas spends 25% of its fuel tax revenue on education” and Kansas spends some gas tax revenue on schools and Medicaid. Then there’s the fact that much fuel tax revenue goes to pay off debt interest.
In response to stagnant or declining gas tax revenue, some states are increasing their gas taxes to raise revenue.
- Maryland now indexes motor fuel tax rates to changes in the consumer price index and imposes a sales and use tax equivalent on most motor fuels.
- New Hampshire increased the gas tax by 4.2 cents per gallon on July 1, 2014.
- Vermont imposed in May 2013 a “net gas tax increase of 5.9-cents-per-gallon” that included a “new 2 percent assessment on the price of gasoline.” Linking the tax to the wholesale price of gasoline ensures gas tax revenue rises with the price of gas.
- Wyoming increased the total tax on gasoline and diesel by 10 cents per gallon on July 1, 2013—the first rate increase since 1998.
Other states are taking a different approach. California lowered fuel tax rates in July and New York dropped them in January. Virginia lawmakers opted to eliminate the motor fuel excise tax on July 1, 2013. In exchange, lawmakers increased the state sales and use tax by 0.3% and added a percentage-based sales tax to gasoline and diesel fuel.
Fuel tax, like all indirect tax, is complicated. Indeed, one California State Board of Equalization member says the gas tax system in California is “costly, confusing, and constantly changing….” In short, it’s a nightmare.
The more steps between tax collection and tax remittance, the more room there is for errors. Getting fuel from the ground to the thing it powers involves fuel suppliers, fuel distributors and fuel purchasers, sales orders, purchase orders, invoices and movement accruals. Fuel tax is at the mercy of changing tax laws, changing tax rates, and changing tax rules and regulations.
There’s a lot at play–and a lot at stake. Getting fuel tax rates wrong often translates to penalties, fees, fines, and delinquent taxes.
An automated solution
Automating fuel tax compliance allows businesses to determine and file fuel taxes reliably and accurately. Learn more.