Vehicle fuel taxes

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Vehicle fuel taxes are policies that tax the purchasers of petroleum-based fuel in order to collect revenues to maintain public transportation infrastructure, promote fuel efficiency, and recoup the social costs imposed by pollution caused by certain vehicle fuel emissions. Vehicel fuel taxes are excise taxes – taxes imposed on particular goods or activities.[1] Generally, such taxes can be calculated in two ways: “as a percent of the value of the good . . . or as a set value per unit of the good.”[1]

Fuel taxes serve many purposes. First, they are implemented in order to raise revenues which may be used generally or may be earmarked for maintenance or improvement of transportation infrastructure. [1] Additionally, fuel taxes may influence the behaviors of transportation infrastructure users -- particularly drivers. [1] Through the tax, drivers internalize the public costs of using the road network. [1] As a result, drivers may choose to purchase more fuel efficient vehicles, to utilize public transit, or to alter trip length or frequency -- choices which, in turn, may offset the negative impacts of automobile use like environmental pollution or congestion. [1]

At the federal level in the United States, fuel taxes on gasoline, diesel and other fuels are calculated as a unit tax – a rate in cents per gallon of fuel.[2] The rates vary based on the type of fuel being taxed.[2] In addition to the federal motor fuel tax, all fifty states also impose unit taxes on motor fuel, though the rates vary considerably from one state to another. [3] Some states also allow localities to collect motor fuel taxes either as unit taxes or as percentage of the value of gallon of fuel.[3] These fuel-specific excise taxes may also be levied on motor fuel in addition to other types of taxes and fees related to the purchase or sale of motor fuel.[2]

CONCEPT


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Goals

A number of goals have been asserted to justify imposing a motor fuel excise tax. The following list is not exhaustive, and each listed goal may be direct or indirect depending on the way in which the tax is structured:

Conceptual Example

Jurisdiction A lacks revenue to update and maintain its road network. Jurisdiction A would like to increase the revenue available for construction and maintenance of public roads. To achieve this end, Jurisdiction A imposes a tax of 15% tax on the value of each gallon of fuel sold. All revenues raised by the tax are deposited into a trust fund that can only be used by Jurisdiction A to construct and maintain its road network. Jurisdiction A's fuel tax is reviewed every ten years and adjusted to ensure the solvency of its trust fund, the sufficiency of funds available to maintain transportation infrastructure, and the efficiency with which vehicle fuel is consumed.

Specific Example

1. Federal

Under the most recent U.S. federal motor fuel tax program, the United States government levied an 18.4 cent tax on each gallon of gasoline.[2] Diesel fuel and kerosene was taxed at 24.4 cents per gallon.[2] Additional fuels were taxed at a similar rates and all rates were calculated “based on energy content relative to gasoline.”[2] The Internal Revenue Service collects the tax from fuel companies “when [the] product is removed from bulk storage terminals.”[2] After the revenue is collected, it is divided and allocated to two federal trust funds.[4]

The first fund, the federal Highway Trust Fund (“HTF”) receives 18.3 cents per gallon of gasoline and 24.3 cents per gallon of diesel fuel.[4] HTF funds are further divided between an account set aside for highway construction and maintenance and an account used to fund mass transit.[4] Sixteen percent of HTF funds are assigned to the mass transit account with the remainder dedicated to highways.[4] The Federal Highway Administration then distributes HTF funds to the states.[4]

The second fund, the Leaking Underground Storage Tank (“LUST”) Fund, receives 0.1 cent per gallon of gasoline and diesel fuel.[4] LUST Fund dollars are used “to pay expenses incurred by the Environmental Protection Agency . . . and the state for preventing, detecting, and cleaning up leaks from petroleum underground tanks.”[4] Additionally, some LUST Fund money is used to study the compatibility of current storage tanks with the needs of alternative fuel products.[4]

The federal motor fuel excise tax is subject to limited exemptions for specific fuel uses.[2] Additionally, some users are entitled to a refund of motor fuel excise taxes paid.[2]

2. State

The Commonwealth of Virginia, like the federal government, also collects a motor fuel excise tax.[5] Currently, the Commonwealth levies a tax of 16.2 cents per gallon of gasoline and 20.2 cents per gallon of diesel fuel.[6] Similar tax rates are also used for blended and alternative fuels.[6]

The Virginia Department of Motor Vehicles collects the motor fuel excise tax “as the fuels leave the terminal rack.”[5] This means that individuals or businesses that supply, import, or blend gasoline or diesel fuels are responsible for paying the tax when the fuel is transferred to a tank for shipment.[5] The monies collected through the motor fuel tax are set aside along with other resources to fund transportation projects.[7]

3. Local"

As mentioned above, some states allow local governments to impose their own motor fuel taxes.[3] For instance, the County of Maui, Hawaii imposes a 18 cent per gallon tax on gasoline and diesel fuels.[8] In another, more limited example, Hancock, Harrison, and Jackson Counties along the Gulf Coast of Mississippi collect 3 cents per gallon of gasoline as a “Seawall Tax.”[9]

Tradeoffs

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Tradeoffs of implementing this policy may include:

  1. Disproportionate Effect on Rural Drivers": Even in the United States, where automobile use is ubiquitous, some regions may rely more on cars and trucks for transportation than others. [10] For instance, on average, individuals and families in rural areas drive more than individuals and families in suburban or urban areas. [10] Additionally, because of low density, rural drivers have to travel longer distances to reach their destinations. [10] Rural households are also more likely to own multiple vehicles and those vehicles are less likely to be fuel efficient. [10] Because of these factors, rural households may consume more gasoline or diesel fuel that non-rural households which would result in a greater tax burden for those households.[1] Other geographic inequities may result based on how a tax program is structured, how revenues are allocated, and how projects are chosen.
  2. Disproportionate Effect on Low-Income Individuals: In addition to geographic inequity, some argue that fuel taxes are more burdensome to lower-income individuals.[1] Despite the fact that all income groups would pay the same rate on taxed fuels, it is likely that a fuel tax would be regressive in nature. [11] This is so because lower-income individuals spend more of their income (as a percentage) to pay the same tax as a higher-income individual. [11]
  1. Broader Economic Implications: Increasing the cost of fuel increases the cost of transportation and those costs may influence the decisions of fuel consumers. [1] By making transportation more expensive, businesses and consumers who rely on transportation to engage in economic activity may change their behavior in ways that negatively affect the broader economy. [1]
Compatibility Assessment

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If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Does the jurisdiction need to raise revenues (either generally or for transportation infrastructure construction or maintenance)?
  2. Does vehicle use in the jurisdiction cause in traffic congestion, air pollution, or other negative impacts?
  3. Could a fuel tax alter user behaviors in ways that limit the harms caused by use of automobiles on transportation networks?
  4. Could revenues collected be used to improve current transportation infrastructure to make travel more convenient or efficient?
  5. Could revenues collected be used to invest in alternative travel modes that produce less significant environmental or social impacts?
Design

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  1. What will be the rate(s) of a vehicle fuel tax?
    1. One major consideration that policymakers must address when formulating a fuel tax program is the rate at which fuel will be taxed. As mentioned above, the U.S. federal motor fuel tax is structured as a unit tax with a fixed price per gallon of fuel. [2] Critics of the U.S. system argue that the fixed nature of the tax – which is not tied to inflation or fluctuations in gas prices – resulted in an inability of the revenues to meet the need for infrastructure improvements. [12] This is especially true given the increase in the cost of infrastructure maintenance. [13] Utilizing a more flexible rate setting mechanism may make a motor fuel tax more capable of responding to macroeconomic changes. [13]
  2. What restrictions will be imposed on the use of any revenues raised through levying of fuel taxes?
    1. There are four general ways to allocate revenues raised from such a tax. [14]
      1. First, revenues can be used to “pursue the same goal” of the tax. [14] In this context, the revenues would be used to build and maintain transportation infrastructure – much like what is already done in the U.S.[2][14]
      2. The revenues could also be used to “offset the tax burden” or to “offset costs of the taxed activity.” [14] In the fuel tax context, this might mean revenues could go to assist consumers to whom the tax costs are shifted or could be put toward programs intended to reduce pollution from automobiles. [14]
      3. Finally, revenues could be deposited in a general fund and could be used for unrelated programs.[14] Each of these methods of allocation may be appropriate under specific circumstances and could be utilized to pursue particular policy goals that motivate a fuel tax program.
  3. Should fuel tax rates be reviewed to assess compatibility with changing technology or economic circumstances?
    1. Another issues with which policymakers must contend is the increasing fuel efficiency of of vehicles today.[12] As vehicles are able to run longer on less fuel, consumers are spending less on fuel, assuming that the amount of driving is consistent.[12] Thus greater fuel efficiency has, in part, contributed to the decrease in the amount of revenue collected through the fuel tax. [12] This trend may continue as evermore efficient vehicles become available. [12]
  4. How should the fuel tax be collected?
    1. As mentioned, a vehicle fuel tax is often collected by fuel distributors at the point when fuel is transferred to commercial sellers. A fuel tax could also be collected at the point of sale (like a sales tax) or paid directly to the taxing agency by the consumer.


ADOPTION


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Motor fuel excise taxes have a long history in the United States.[1] With the first state-level tax imposed in 1919 and the first federal fuel tax adopted in 1932, Americans have nearly 100 years of experience with motor fuel taxation.[1] As mentioned, though federal, state, and local fuel tax systems may be designed differently, most follow a similar pattern and have been widely accepted as a policy tool throughout the country.[3]

PolicyGraphics
Adopters


STAKEHOLDERS


Multiple stakeholders may be interested in this issue. It is important to note, however, that many stakeholders may have mixed motives. For instance, some automobile owners may support improved highway maintenance, while others may oppose increased out-of-pocket expenses as the cost of fuel taxes is passed to consumers. Additionally, stakeholders’ views will depend on a fuel tax program’s goals, its structure, and how its revenues are utilized. The lists below serve as an illustration and were formulated with the current U.S. system in mind. [15]

Supporters

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Opponents

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  • Advocates - Progressive Taxation Assumption: Fuel taxes disproportionately harm low-income individuals because low-income individuals pay more (as a percentage of their income) to pay the same tax per unit of distance traveled as higher-income individuals.
  • Associations - Oil and Gas Assumption: Increasing fuel prices make use of taxed fuels less attractive to consumers which, in turn, harms industry members' bottom lines.
  • Constituent Groups - Automobile Clubs and Owners Assumption: Fuel tax costs are passed to the consumer and make fuel more expensive for consumers.
  • Constituent Groups - Commuters Assumption: Fuel tax costs are passed to the consumer and make fuel more expensive for consumers.
  • Constituent Groups - Low-Income Residents Assumption: Fuel taxes disproportionately harm low-income individuals because low-income individuals pay more (as a percentage of their income) to pay the same tax as higher-income individuals.
  • Constituent Groups - Rural Residents Assumption: Rural residents are more likely to rely on automobiles for transportation and are more likely to face lengthy trip distances requiring more fuel. As a result, rural residents will pay more in fuel taxes than urban or suburban residents who may have other transportation options or who have shorter trip distances.


REFERENCES


Research

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  • [Click "edit" above to insert links].
Resources

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  • Federal Highway Administration, U.S. Dept. of Transportation, "Motor Fuel Tax Compliance" (last visited on Oct. 24, 2016). Available at https://www.fhwa.dot.gov/motorfuel/faqs.htm
  • Sean Lowry, Congressional Research Service, The Federal Excise Tax on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History (2015).
  • Robert Pirog, Congressional Research Service, The Role of Federal Gasoline Excise Taxes in Public Policy, 1 (2009).
  • U.S. Energy Information Administration, Today in Energy: State Taxes on Gasoline and Diesel Average 27 Cents Per Gallon, available at http://www.eia.gov/todayinenergy/detail.php?id=25872
Footnotes
  1. 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 1.11 Robert Pirog, Congressional Research Service, The Role of Federal Gasoline Excise Taxes in Public Policy, 1 (2009) Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content Cite error: Invalid <ref> tag; name "Pirog.2C_R." defined multiple times with different content
  2. 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 [1]. Federal Highway Administration, U.S. Dept. of Transportation, Motor Fuel Tax Compliance (last visited Oct. 24, 2016). Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content Cite error: Invalid <ref> tag; name "FHA_-_Compliance" defined multiple times with different content
  3. 3.0 3.1 3.2 3.3 [2]. U.S. Energy Information Administration, Today in Energy: State Taxes on Gasoline and Diesel Average 27 Cents Per Gallon (last visited Oct. 24, 2016).
  4. 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Sean Lowry, Congressional Research Service, The Federal Excise Tac on Motor Fuels and the Highway Trust Fund: Current Law and Legislative History (2015). Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content Cite error: Invalid <ref> tag; name "Lowry.2C_S." defined multiple times with different content
  5. 5.0 5.1 5.2 [3] Virginia Department of Motor Vehicles, Fuels Tax - General Information (last visited Oct. 24, 2016).
  6. 6.0 6.1 [4] Virginia Department of Motor Vehicles, Fuels Tax Rate and Alternative Fuels Conversion (last visited Oct. 24, 2016).
  7. [5] Virginia Department of Planning and Budget, Virginia's Budget: Frequently Asked Questions (last visited Oct. 24, 2016).
  8. [6] Department of Taxation, State of Hawaii, Department of Taxation Announcement No. 2015-01 (last visited Oct. 24, 2016).
  9. [7] Department of Revenue, State of Mississippi, Gasoline and Petroleum FAQs (last visited Oct. 24, 2016).
  10. 10.0 10.1 10.2 10.3 [8]. Federal Highway Administration, U.S. Department of Transportation, Household Travel in America in 2010 Status of the Nation's Highways, Bridges, and Transit: Conditions and Performance.
  11. 11.0 11.1 [https://apps.irs.gov/app/understandingTaxes/whys/thm03/ les05/media/ws_ans_thm03_les05.pdf]. Internal Revenue Services, worksheet Solutions: Comparing Regressive, Progressive, and Proportional Taxes
  12. 12.0 12.1 12.2 12.3 12.4 [9]. Chris Mooney, The Gas Tax Has Been Fixed at 18 Cents for Two Decades. Now Would Be a Great Time to Raise It, Washington Post, Dec. 3, 2014.
  13. 13.0 13.1 [10]. Wallace Tyner. Should the U.S. Raise Its Fuel Tax? World Economic Forum (Jan. 15, 2015).
  14. 14.0 14.1 14.2 14.3 14.4 14.5 [11]. What Should We Do with the Money from Taxing "Bads"?, Tax Policy Center (Jan. 28, 2016).
  15. Institute on Taxation and Economic Policy, Building a Better Gas Tax: How to Fix One of State Government's Least Sustainable Revenue Sources (Dec. 2011).
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