Inflation Adjusted State Gas Taxes

April 27, 2009

Joseph Bishop-Henchman

Joseph Bishop-Henchman

We’ve been asked which states index their gas tax to inflation. Two states (Florida and Maine) adjust their state gas tax by the consumer price index, and Nebraska adjusts it by a state funding formula. Three additional states (Kentucky, North Carolina, and West Virginia) link their state gas tax to the wholesale price, which tends to grow with inflation. So, six states.

Other states impose sales tax or other taxes partly or wholly on gasoline purchases, in addition to the gas tax: California: 7.25 percent sales tax; Connecticut: 7.0 percent gross earnings tax; Georgia: 4 percent Prepaid State Tax; Hawaii: 4 percent gross income tax (but exempted for gas sold with ethanol in it, so all gas sold has ethanol in it); Illinois: 6.25 percent sales tax (suspended for the period beginning July 1, 2000, and ending December 31, 2000); Indiana: 7 percent sales tax (suspended for the period between July 1, 2000 and September 15, 2000); Michigan: 6 percent sales tax; New Jersey: gross receipts tax of 4 cents per gallon for on-highway use fuels; New York: 8.0 cents per gallon State sales tax in addition to local sales taxes; Virginia: 2 percent sales tax in areas where mass transit systems exist.

The Alaska state gas tax is currently suspended.

This post updated with additional information after it was initially posted.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

A gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.