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Gas Tax

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.

Why Do We Have These Taxes?

The basic justification for gas tax policies (gasoline excise taxes) is what economists call the benefit principle of taxation. Simply stated, consumers of government services should pay in proportion to the benefit they obtain from those services.

Funds generated from a gas tax pay for related government services like road construction, maintenance, repair, and public transportation. Because these taxes connect drivers to the costs of road upkeep, they encourage efficient road use, which helps limit congestion and the wear and tear that comes from overuse.

However, the federal government and many states have not indexed their specific rates for inflation, leading the real value of gas tax revenue to fall behind infrastructure spending needs across the country. The federal gas tax has been set at 18.4 cents per gallon of gasoline since 1993. In real terms, the gas tax has lost almost half its value since its last adjustment in 1993 because it is not indexed for inflation.

Gas taxes also face a narrowing tax base, as the improvement in vehicles’ fuel usage along with the growth in sales of electric vehicles reduces the tax’s connection to vehicle-based externalities. An alternative to these taxes would be a tax on vehicle miles traveled (VMT) to ensure that those driving on the roads are paying for the roads.

2023 state gas tax rates by state California Illinois Pennsylvania

Tax Holidays: Good or Bad Policy?

Gas prices soared in early 2022 because of inflation and Russia’s war against Ukraine, leading some policymakers to consider suspending the federal gas tax to aid consumers (several governors also considered implementing state gas tax holidays). The Committee for a Responsible Federal Budget estimated it would cost roughly $20 billion to suspend the federal gas tax from March to December 2022. That’s almost half of the $43 billion in total revenue the Congressional Budget Office expects the Highway Trust Fund to raise in the next year; suspending the excise tax on diesel fuel would produce additional costs.

In the context of the economy, reducing or eliminating the gas tax could encourage more consumer use of gas and exacerbate inflation.

In general, tax holidays (including sales tax holidays) do not promote economic growth but instead complicate the tax code and weaken state and federal government revenue streams.


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