Why excise tax on gasoline

How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel? The taxes and other fees on retail gasoline and diesel fuel, in cents per gallon, as of July 1, Gasoline Diesel Federal In the edition , see tables: 8. Federal excise tax rates on motor fuels and lubricating oil 8. State tax rates on motor fuel 8. State tax rates on motor fuel Articles on taxes Last updated: August 23, Other FAQs about Gasoline How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel?

Does EIA publish inflation-adjusted gasoline prices? What do I pay for in a gallon of gasoline and diesel fuel? How much gasoline does the United States consume? Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Personal Finance Taxes. What Is an Excise Tax? Key Takeaways Excise taxes are taxes required on specific goods or services like fuel, tobacco, and alcohol.

Excise taxes are primarily taxes that must be paid by businesses, usually increasing prices for consumers indirectly. Excise taxes can be ad valorem paid by percentage or specific cost charged by unit. Some excise taxes can be required directly from the consumer like property taxes and excise tax penalties on certain retirement account activities. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Understanding Taxes A mandatory contribution levied on corporations or individuals by a level of government to finance government activities and public services.

Sin Tax Definition A sin tax is an excise tax levied on goods and services deemed harmful to society, such as tobacco, alcohol, and gambling. Consumption Tax A consumption tax is a tax on the purchase of a good or service; or a system taxing people on how much they consume rather than what they add to the economy income tax.

Tax Revenue Definition Reliance on income taxes versus consumption taxes is one big difference between U. Learn the options. Alternatively, if gasoline prices fell, the tax would automatically rise to keep the price including tax at the target price level. In this way, the tax would provide a more constant incentive to consumers to purchase fuel-efficient vehicles, drive less, and encourage interest in alternative fuel vehicles.

Economists identify two factors in consumer purchases, the substitution effect and the income effect. A tax raises the relative price of gasoline relative to other goods, causing consumers to respond with a decision to buy less of the good; this is called the substitution effect.

Taxes also make the taxed goods more expensive, reducing consumers' general purchasing power; this is called the income effect. Even if the income effect is reversed through a tax rebate program, the substitution effect will still encourage lower consumption of the taxed commodity. In this way, the tax could have a minimal effect on purchasing power if consumers chose to follow market economic incentives and minimize consumption of the taxed good.

If they chose to attempt to continue to consume at pre-tax levels, purchasing power would be reduced, but that would be the free choice of the consumer.

The variable gasoline tax, set at a sufficiently high level to affect consumer decisions, could be expected to stimulate the demand for smaller, more fuel-efficient automobiles, spur the development of cars that use alternative energy sources, reduce U.

Table 1. Comparative Gasoline Prices and Taxes, August While U. S consumers have enjoyed low taxes on gasoline for some time, taxes in other industrialized nations make retail prices higher. High gasoline taxes in Europe have provided incentives for consumers to buy smaller cars, drive less, and switch to diesel fuel, which offers better fuel economy than comparable gasoline-fueled automobiles.

Although the gasoline taxes in the countries identified in Table 1 are not variable, the taxes appear to be high enough to avoid the changing incentives that the current U.

With U. Revenue on this scale might have a negative effect on the overall purchasing power of the economy, which might be a problem, especially in a recession. This could be ameliorated if tax revenue were recycled back into the economy through increased infrastructure projects, or expenditures on alternative energy projects.

If desired, the tax revenue could be returned to households through an income tax rebate program, or a reduction in the income tax rates.

If the revenue were returned to taxpayers in this way, the variable gasoline tax could still achieve a portion of its conservation goals through a higher relative price of gasoline, which would discourage consumption. Revenues generated by the gasoline tax could also assure funding for the Highway Trust Fund, improve the mass transit infrastructure, and fund research and development of alternative energy sources, as well as contribute to deficit reduction.

The U. A combination of rapidly increasing demand for petroleum products, especially gasoline, coupled with favorable price spreads between high and low quality crude oils, led to high rates of capacity utilization, yielding record profit levels for both the major oil companies and independent refiners.

During this period, concern was expressed that U. Since the state of and outlook for the petroleum refining industry have changed. Current weak product demand conditions have resulted in lower capacity utilization rates, refinery closures, and reduced profitability. The near-term outlook suggests continued rationalization will occur in the industry until excess capacity is eliminated. A tax on gasoline, to the extent that it reduces gasoline demand, would likely create additional economic pressure on the refining industry.

Capacity utilization rates could continue to fall, further plant closures would be likely, and the profit picture could deteriorate even further. If gasoline demand is extremely price inelastic, as discussed in this report, the magnitude of the effects on the refining industry would likely be proportionately small, especially if the gasoline tax was small. The Obama Administration has expressed interest in reduced carbon emissions, reduced dependence on imported oil, and the development of alternative, renewable energy sources.

The Highway Trust Fund is in need of an increase in stable funding. These goals might be attained through a renewal of, and possibly an increase in, the federal excise tax on gasoline. To facilitate consistent economic decision-making the tax could be set with variable rates, or levels, which would also enhance the predictability of the revenue base.

However, a gasoline tax increase is also likely to be unpopular with consumers. It might also drain purchasing power, especially from an economy that remains weakened by recession. Under some cases, economists believe that the price does not rise as much as the tax, but this result depends on supply characteristics, including relative elasticities, that are not likely to apply to petroleum refining.

Martin A. Tax revenue may also be used to pay interest on, or retire, national debt, provide a variety of income transfers, or provide aid to foreign nations. Price elasticity of demand measures the sensitivity of the quantity demanded to variations in price. It is calculated as the percent change in quantity demanded divided by the percent change in price. See James D. Economists use the term social cost to refer to the sum of the private cost of the good plus, or minus, any additional costs accruing to society including, for example, those associated with national security or environmental pollution.

James D. The Federal Highway Administration estimates that high fuel prices, reduced income growth due to recession, and other factors resulted in a 3.

Topic Areas About Donate. The Role of Federal Gasoline Excise Taxes in Public Policy September 11, — August 16, R American drivers, compared to those in industrialized nations in Europe, pay relatively low federal, state, and local gasoline and diesel excise taxes. Download PDF. Download EPUB.

Comparative Gasoline Prices and Taxes, Summary American drivers, compared to those in industrialized nations in Europe, pay relatively low federal, state, and local gasoline and diesel excise taxes. Introduction Gasoline taxes affect both the national economy and the decisions of individual consumers. Background Excise taxes are, in effect, sales taxes levied on specific goods. Changing Demand-Supply Relationships The legal, or statutory, incidence of an excise tax on gasoline is on the refiner; however, the tax is typically passed on to the consumer, and is paid at the pump along with state and local taxes, leaving the economic incidence of the tax with the consumer.

Reducing Gasoline Price Volatility Two key factors in explaining gasoline demand in the United States are price and consumer income. Comparative Gasoline Prices and Taxes, August dollars per gallon. Notes: In some cases, data are not consistent with respect to fuel grade.