Gas Taxes and What You Need to Know

Investing News

Gas taxes are excise taxes you pay when you fill up your car with gas. The federal government and states both impose gas taxes, with much of the revenue raised going toward fixing highways and other infrastructure projects. State gas taxes range from just under 10 cents to nearly 60 cents for a gallon of gas, though some states charge based on the price—rather than the amount—of gas you’re buying.

Key Takeaways

  • Federal and state governments impose gas taxes to help pay for road infrastructure projects.
  • The average state gas tax is about 30 cents a gallon, though they range from less than 10 cents to nearly 60 cents a gallon.
  • Not enough gas tax revenues are being raised to cover infrastructure costs, as many tax rates don’t rise with inflation, and cars are becoming more fuel-efficient.

How Have State Gas Taxes Evolved?

A brief history

States have been levying taxes on gas since the early days of automobile travel in the U.S. In 1919, a little over a decade after Henry Ford’s Model T made owning a car affordable to the masses, Oregon became the first state to create a gas tax—at one cent per gallon. Within 10 years every state was collecting gas taxes. The federal government followed suit in 1932, establishing a nationwide gas tax of one cent per gallon to help pay for Depression-related programs.

The basic concept behind the tax is the benefits received rule: Whoever benefits from something the government provides should help pay for it. Thus, drivers pay for a gas tax to help cover the cost of building and maintaining roads, bridges, and tunnels—as well as to help address traffic-related issues such as congestion and pollution.

Current problems

Unfortunately, the revenue raised from gas taxes has failed to keep up with rising infrastructure costs and the overall pace of inflation. At the same time, the development of electric vehicles and cars with greater fuel efficiency has cut down on gas demand and eaten into government coffers. 

While the federal gas tax has been stuck at 18.4 cents a gallon since 1993, the increasing squeeze on transportation budgets has led many states to raise the gas tax in recent years. Tax hikes have been imposed in 36 states since 2010, and taxes in Alabama and Washington, D.C., are set to increase in October.

Meanwhile, more states are changing how their taxes work to try to keep up with rising gas prices and overall inflation. Nearly half of states now set gas taxes that vary in some way, using formulas linked to everything from gas prices and the Consumer Price Index to fuel efficiency and population growth. For example, Indiana links its gas tax rate to both the rate of inflation and income levels of people who live in the state. 

Most states have also added a range of other taxes and fees on top of the gas tax, including environmental, underground storage, and inspection fees. Other types of fuel are taxed as well, including diesel, ethanol, aviation fuel, and alternative sources, such as natural gas.

How Much Are State Gas Taxes?

When you add up all the taxes and fees, the average state gas tax is 30.06 cents per gallon, as of the beginning of 2021, according to the U.S. Energy Information Administration. Throw in the 18.4 cent federal tax, and it starts to add up. In fact, gas taxes accounted for about one-fifth of the $2.50 average price for a gallon of gas, as of February 2021.

Here’s a rundown of the gas taxes in each state, including other taxes and fees:

Source: U.S. Energy Information Administration.

What Do Gas Taxes Pay For?

The vast majority of revenue from gas taxes goes toward fixing the wear and tear on the country’s roadways from all that driving. In fact, about half of the states have laws requiring that money raised by fuel taxes be used for roads and bridges. Most of the other states dedicate the revenue toward some type of transportation, with New York putting more than a third of its gas tax proceeds into mass transit. Still, some states divert money for other purposes, such as law enforcement, environmental protection, and education. For example, Texas dedicates a quarter of its gas tax revenue to schools.

At the federal level, while some of the revenue from the gas tax has at times been diverted to help reduce the national budget deficit, nearly all funding currently goes into the Highway Trust Fund. An additional one-tenth of a cent of each gallon goes toward cleaning up leaks from underground petroleum storage tanks. And not all of the highway fund is dedicated to maintaining roads, with 2.86 cents out of the 18.4 cent gas tax put aside to support mass transit.

However, gas taxes raised at both the state and federal level are increasingly falling short of what’s needed to maintain and expand the country’s roadways. The Highway Trust Fund has had to take money from the U.S. Treasury Department’s general fund since 2008.

The Bottom Line 

Given the increasing shortfalls, federal and state officials will need to consider how to keep paying for paving the country’s roadways and fixing its potholes. At the federal level alone, the collective deficit in the Highway Trust Fund is expected to grow to nearly $200 billion by 2030. And that’s assuming Congress continues to extend the gas tax, with all but 4.3 cents scheduled to expire in September 2022. 

In addition to options such as hiking the gas tax and allowing it to rise with inflation, some states have started charging electric vehicle owners an annual fee. Given that the country’s infrastructure is already barely getting a passing grade, with the American Society of Civil Engineers’ Report Card rating it a C-, the funding issue will likely only grow in urgency. Whether infrastructure ends up benefiting from the $621 billion proposed for it by President Biden’s yet-to-be-passed American Jobs Plan—and how that might affect gas taxes—remains to be seen.