Americans are obsessed with the price of gasoline. The corner gas station announces them in big, brightly lit numbers and there is nothing anyone can do about them. The price of gasoline is a metric that people pay attention to and have come to associate with the success or failure of elected leaders, the economy, and environmental policies. 1
The price of crude oil accounts for roughly one-half of the price of a gallon of gasoline or diesel fuel.2 The price of oil is determined in an international market. However, the tax policies of federal and state governments have a big impact on the price at the pump.
Governments impose an excise tax on gasoline and diesel fuel. An excise tax is a per-unit tax that costs a specific amount for a volume or unit of the item purchased. The Revenue Act of 1932 passed by Congress established a federal excise tax of $0.01 per gallon of gasoline.3 In 2023 federal taxes include excise taxes of $0.183 per gallon on gasoline and $0.243 per gallon on diesel fuel and a Leaking Underground Storage Tank fee of $0.001 per gallon on both fuels.4
Every state imposes additional taxes on gasoline and diesel. In 2023 the lowest state excise tax on gasoline was $0.04 per gallon in Florida while the highest was $0.61 per gallon in Pennsylvania. Most states impose other forms of taxes. Florida imposes taxes with names such as the Coastal Protection tax, the Water Quality tax, the Inland Protection tax, and the Petroleum and Inspection fee that total an additional $0.33 per gallon of gasoline. California imposes a 2.25% state sales tax on gasoline and a 9.0625% state sales tax on diesel.
Why are fuel taxes so popular with state and federal governments? The answer is simple: they generate tens of billions of dollars in revenue. The federal excise taxes on gasoline and diesel fuel are the principal sources of revenue for The Highway Trust Fund which finances most federal government spending for highways and mass transit.5
1 Spiller, Beia and Heather Stephens, “Gas Prices 101,” Resources for the Future, September 9, 2022, Link
2 U.S. Energy Administration, “How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel?” accessed December 20, 2023, https://www.eia.gov/tools/faqs/faq.php?id=10&t=10
3 Francis, Brian, “Gasoline Excise Taxes, 1933-2000,” Internal Revenue Service, https://www.irs.gov/pub/irs-soi/00gastax.pdf
4 U.S. Energy Administration, “State tax rates for retail gasoline and diesel increased in 13 states in 2023,” February 23, 2023, https://www.eia.gov/todayinenergy/detail.php?id=55619
5 Urban Institute, Brookings Institution, “What is the Highway Trust Fund, and how is it financed?” accessed December 20, 2023, Link
