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Taxes: Gas Tax at the Federal and State Level

By Robert Lee, Ph.D., CMA, CPA, and Justin Lee
October 1, 2022

Discussions are taking place regarding federal and state gas tax holidays, but it’s unclear how much actual relief, if any, they’d provide to taxpayers.

 

Spurred by a combination of the conflict in Ukraine as well as rising inflation rates, gas prices are up in the United States more than 50% over last year. For some states, such as Arizona and Massachusetts, gas prices have gone up more than 60% from last year. As usual, western states, such as California, Hawaii, Alaska, and Nevada, have the highest gas prices, while southern states, such as Georgia, South Carolina, Mississippi, and Arkansas, continue to have the lowest gas prices. Across the nation, gas prices are historically high and could continue to increase over time.

 

High gas prices have left millions of people in tough financial predicaments. With many Americans living paycheck to paycheck, gas prices are a pressing issue. Currently, the federal government taxes 18.4 cents per gallon of gasoline and 25 cents per gallon of diesel.

 

In response to this nationwide issue, President Joe Biden has called on Congress to suspend the federal gas tax for three months. Yet Speaker of the House Nancy Pelosi and others have questioned how much this legislative decision would actually help people.

 

Conversely, some are asking if simply taxing excess profits for major gas companies would be more practical and beneficial to the public.

 

HIGHWAY TRUST FUND

 

Unfortunately, the potential for a three-month gas tax holiday doesn’t seem to pass the cost-benefit analysis check. Currently, the funds from the federal gas tax go to the Highway Trust Fund, which contributes to highway expenditures and public mass transit, such as subways and buses.

 

The White House predicts that if the gas tax holiday were passed, the Highway Trust Fund would lose approximately $10 billion. And although the president has said that other sources of revenue can compensate this loss, this remains uncertain.

 

While the White House said the president knows the gas tax holiday won’t solve the problem of rising gas prices, he believes it will provide “breathing room” for Americans. But if we look further into how much breathing room would be provided, the savings are quite minimal.

 

For example, let’s consider someone who drives 12,000 miles per year in a car that averages 20 miles per gallon (to use a conservative estimate). If the gas tax holiday was implemented, the savings would only be around $10 dollars per month, for a total of $30 during the three-month span.

 

With the rise in demand for hybrid and electric cars over the last 10 years, most cars average more than 20 miles per gallon, decreasing the savings even further. And with inflation, these savings would be even less.

 

STATE TAXES

 

Although the possibility of a federal gas tax holiday occurring looks slim, gas tax holidays may appear at the state level. Each state can have a state excise gas tax and other gas taxes, such as oil inspection fees, county and local taxes, underground storage tank fees, and environmental fees. The total state gas tax is the sum of the state excise gas tax and other state gas taxes.

 

According to the American Petroleum Institute (API), the national average state excise tax is about 26.2 cents per gallon for gasoline and 26.7 cents per gallon for diesel. The national average for other state gas taxes are 12.5 cents per gallon for gasoline and 13.5 cents per gallon for diesel. This is a total gas state tax average of about 38.7 cents per gallon of gasoline and 40.2 cents per gallon of diesel.

 

Combined with the federal gas tax of 18.4 cents per gallon of gasoline and 25 cents per gallon of diesel, the total state average gas tax would be 57.1 cents per gallon of gasoline and 64.6 cents per gallon of diesel.

 

Looking further at the state level, the range of total state gas tax can range from state to state. According to the API, the states with the total highest gas taxes are California (68.2 cents per gallon), Illinois (59.6 cents per gallon), Pennsylvania (58.7 cents per gallon), Hawaii (51.7 cents per gallon), and New Jersey (50.7 cents per gallon).

 

The states with the lowest gas taxes are Alaska (15.1 cents per gallon), Mississippi (18.8 cents per gallon), New Mexico (18.9 cents per gallon), Arizona (19 cents per gallon), and Missouri (19.9 cents per gallon).

 

Just as the federal gas tax supports the Highway Trust Fund, state gas taxes are primarily used for highway and road expenditures, such as construction of new highways and roads, and maintenance and repair (i.e., snow removal and safety issues).

 

GAS TAX INCENTIVES

 

Given the current high prices of gas, many states are looking at various gas tax incentives to help their citizens. Some states are proposing a gas tax holiday for 30 days, while others are proposing a holiday until the end of the year or for a full year.

 

States are also looking at different gas tax savings, such as suspending their state gas tax, decreasing the gas tax, or providing gas tax rebates.

 

Earlier this year, Maryland became the first state in the U.S. to suspend its gas tax. (It was later joined by Georgia, Connecticut, New York, and Florida.) Maryland Governor Larry Hogan enacted a 30-day gas tax holiday that saved state residents 36 cents per gallon. He later tried to extend this holiday period for another 60 days, but this was ultimately denied by the state legislature.

 

Similar to the federal government, states are having a difficult time passing some form of gas tax holiday. But if gas prices continue to stay at their current level or rise, the gas tax holiday will continue to be discussed, whether at the federal or state level or both.

 

In addition, with speculations of the economy going into a recession coupled with national holidays around the corner and many Americans traveling to see friends and family, high gas prices will continue to be a problem. The question is: Are gas tax savings truly beneficial to individuals in the long run? And are the savings they receive from a gas tax holiday worth reducing revenue from state and federal funds?

 

© 2022 A.P. Curatola

 

Robert Lee, Ph.D., CMA, CPA, is an associate professor of accounting in Pepperdine University’s Graziadio Business School. He also is a member of IMA’s Los Angeles Metro Chapter. Robert can be reached at robert.lee2@pepperdine.edu.
Justin Lee is a research assistant at Pepperdine University’s Graziadio Business School. He can be reached at justinbertlee@gmail.com.
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