Questionable Moments in Tax History: Federal Fuel Tax Exemptions

June 18, 2014
By 

The federal fuel tax sounds like it could be a simple excise tax. In a world with competent, broad-based tax policy, we could see such a thing. In America, we get IRS forms 720, 4136, 8849, 6478, and 8864.

A broad federal fuel tax makes some sense. There is federal spending on a variety of things (for example, the United States Highway Trust Fund) that directly benefits people in approximate proportion to their fuel usage. Rather than make these services “free,” which leads to overuse, it may be better to “charge” for them through fuel taxes in order to ration the usage.

This idea has its merits, but in practice the implementation is terrible because it gets distracted by a bunch of other capricious or redundant social priorities. The worst of these are the exemptions.

As you have probably realized, you don’t personally pay the fuel tax – rather, the fuel suppliers pay it on your behalf and pass the costs on to you. This is a perfectly reasonable system. However, this means that to be exempt from the fuel tax, you have to “pay” it at the supplier level, and then “un-pay” it at the individual level.

The way you “un-pay” your taxes is through IRS Form 4136. Among the users entitled to a refund:

·         Various kinds of buses

·         Qualified blood collector organizations

·         Aircraft museums

·         Nonprofit educational organizations

·         Commercial fishing boats

·         State and local governments

·         Military aircraft

Everyone likes blood banks and educational organizations. Their priorities are indeed important. But if the purpose of this exemption is to make life easier for blood banks and educational organizations, then it would be better not to (1) tie the size of the funding to how much fuel they use, and (2) require them to hoard gas receipts.

The exemption for various government entities is pointless; better for them to receive funding through their normal processes than through the IRS. The exemption for buses, even, is redundant. The fuel tax is already a subsidy for bus usage; the whole point of a bus is to put many people in the same vehicle for efficiency purposes.

Federal fuel taxes are so bad that even the American Institute of CPAs finds them too confusing. In order to reform them, we could start by getting rid of the tax exemptions for favored organizations, and instead properly funding them through spending.

Subscribe to the Tax Foundation Newsletter

Follow Us

About the Tax Policy Blog

Subscribe to Tax Foundation - Tax Foundation's Tax Policy Blog The Tax Policy Blog is the official weblog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.

Monthly Archive