Download Tax Foundation Fiscal Fact No. 264
TaxA 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. Foundation Fiscal Fact No. 264
Introduction
Every day, news headlines highlight the rising price of crude oil. An article on the determinants of oil prices, ominously titled “The Price of Fear,” was the top story in a recent edition of The Economist.[1] Federal Reserve Chairman Ben Bernanke testified before both houses of Congress that “concerns about unrest in the Middle East and North Africa and the possible effects on global oil supplies have led oil and gasoline prices to rise further.”[2] And a paper coauthored by Berkeley economist Severin Borenstein found that rising oil prices translate into a real financial burden at the pump, estimating that for every $1.00 increase in a barrel of oil there is a 1.31 cent increase in a gallon of gasoline.[3]
Over the past year, the average price of gasoline in the United States has increased by almost 75 cents per gallon.[4] Every state and the federal government impose an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on the sale of gasoline as a fixed number of cents per gallon. Therefore, as gas prices rise, states will see no increase in gas excise tax revenue since the tax rate is fixed regardless of price. In fact, states may even see a drop in revenue if demand decreases due to the higher prices.
Some states, however, apply a sales taxA 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. (or a similar tax) to gasoline, in addition to their excise tax. When gas prices go up, these states will receive additional tax revenue; For example, Indiana levies a 7 percent sales tax on gasoline in addition to its gasoline excise tax. Due to higher gas prices relative to a year ago, Indiana is currently collecting an additional 5 cents for every gallon of gasoline purchased. This amounts to over $202 million in tax revenue for Indiana in just the past year, purely because of the increased price of gasoline.
The following table shows the states that charge a percentage-based tax on gasoline:
|
Table1: State Sales Tax on Gasoline |
||
|
State |
Tax |
Comments |
|
California |
2.35% – 3.25% Sales Tax |
State share 2.25%; district share 0.1%-1.0% |
|
Connecticut |
7% Gross Income Tax |
Paid by the distributor |
|
Georgia |
4% Prepaid Sales Tax |
Prepaid rate is determined on a semiannual basis |
|
Hawaii |
4% Gross Income Tax |
Paid by the distributor |
|
Illinois |
6.25% – 9.25% Sales Tax |
State share 5%; local/county share 1.25%-4.25% |
|
Indiana |
7% Sales Tax |
|
|
Michigan |
6% Sales Tax |
|
|
New York |
3%-4.75% Sales Tax |
Depends on the county |
|
Virginia |
2% Sales Tax |
Only in counties with public transportation |
Source: State revenue departments
Per Gallon Excise Tax
Currently, every state levies an excise tax on gasoline, ranging from 4 to 35.3 cents per gallon.[5] An excise tax is a tax levied on a narrow range of goods, generally dependent on the quantity purchased—in this case, x cents per gallon. Revenue generated from excise taxes is dependent on the quantity of goods purchased, and not the fluctuating market prices of goods. States charge an excise tax because the quantity of gasoline purchased is fairly constant, providing a steady stream of revenue.
Ad Valorem Sales Tax
In contrast to an excise tax, an ad valorem tax is dependent on the price of the goods, and the tax is calculated as a percentage of that price. State and local sales taxes are the most common example of ad valorem taxes. Nine states levy some form of ad valorem tax on gasoline. Four states charge a simple sales tax on the final purchase. Indiana has the highest rate at 7 percent, followed by Illinois at 6.25 percent, Michigan at 6 percent, and California at 2.25 percent (districts can also charge between .1 percent and 1 percent on top of the state rate). Two others levy a gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” tax on the distributor: Connecticut at 7 percent and Hawaii at 4 percent. Georgia charges a 4 percent sales tax to the distributor based on a semiannual rate set by the Georgia Department of Revenue. Additionally, two other states have some form of ad valorem tax on gasoline: while New York exempts gasoline from its state sales tax, individual counties impose their respective sales taxes (between 3 percent and 4.75 percent) on gasoline. Likewise, counties in Virginia with public transportation systems charge a 2 percent sales tax on gasoline. States and localities that tax gasoline based on price as opposed to quantity will likely experience revenue gains based on recent gas prices.
Methodology
All calculations in this paper involving the price of gasoline use data from the U.S. Energy Information Association, and estimates of quantity purchased come from the Federal Highway Administration.
Information regarding excise taxes on gasoline can be found on our website at www.taxfoundation.org/legacy/show/26079.html as well as in the Tax Foundation’s Facts and Figures booklet. Information on which states levy a sales tax is found on individual state governments’ websites.
[1] “The Price of Fear.” The Economist 3 Mar. 2011: 29-32. http://www.economist.com/node/18285768.
[2] Ben S. Bernanke, “Semiannual Monetary Policy Report to the Congress.” 1 Mar. 2011. http://www.federalreserve.gov/newsevents/testimony/bernanke20110301a.htm.
[3] Severin Borenstein, et al. “Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?” Quarterly Journal of Economics, February 1997.
[4] “Weekly U.S. Retail Gasoline Prices, Regular Grade.” U.S. Energy Information Administration, http://www.eia.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html
[5] “2011 Facts and Figures: How Does Your State Compare?” Tax Foundation, 2011. https://taxfoundation.org/files/ff2011.pdf
Share this article