How Does the Gas Tax Work?

Whether you work for a rideshare company or commute to work five days a week, you know how expensive gas can be. What you might not know is that the gas tax plays a key role in gas prices.

The gas tax, or fuel tax, is one of the excise taxes that many people aren’t aware of. Every gallon of gasoline or diesel that’s sold in the US is taxed on a federal level, and every state has an individual fuel tax rate.

Learn more about the history of the gas tax, how it works, and gas tax rates from state to state.

What is the gas tax?

The gas tax is an excise tax that’s paid on any fuel that’s sold in the US. When you fill your vehicle up at the gas station, the price you pay includes both the state and federal taxes for fuel.

This excise tax is one of many factors that affect the cost of gas in the US. Gas prices are also affected by the grade of gas, the gas station you visit, and whether you’re filling up with gasoline or diesel. Even paying cash versus credit could have an impact on how much it costs you to fuel up.

Are all types of fuel taxed?

If you were hoping to save money by switching from a gasoline vehicle to a diesel, you might be surprised to find that in the US, all types of fuel are taxed on both a federal and state level. That means both gasoline and diesel prices have the fuel tax rolled into them.

Keep in mind that gasoline and diesel are taxed at different rates on both a state and federal level. However, the correlation between gasoline and diesel fuel tax rates varies from state to state.

On a federal level, the diesel tax is higher than the gasoline tax. There are also several states where the diesel tax is higher than the gasoline tax. However, a number of states have a lower diesel tax rate.

History of the gas tax

The history of the federal gas tax goes all the way back to March of 1932 when The Revenue Act of 1932 was passed. This was a federal response to the Great Depression, which began a few years earlier in 1929.

Initially, the federal gas tax was 1 cent per gallon. This 1-cent tax was initially set to expire in June 1933, but it was extended through the National Industrial Recovery Act of 1933, and the tax was increased to 1.5 cents per gallon.

Even after the National Industrial Recovery Act of 1933, the gas tax was intended to be a temporary measure. It wasn’t until the Revenue Act of 1941 that the gas tax was made permanent.

The Revenue Act of 1951 increased the federal gas tax rate to 2 cents per gallon. In 1956, the gas tax was raised to 3 cents per gallon to help fund the Interstate System.

After the gas tax was temporarily raised to 4 cents per gallon, President John F. Kennedy approved the Federal-Aid Highway Act of 1961. This extended the 4-cent tax through September 1972.

In 1983, President Ronald Reagan approved the Surface Transportation Assistance Act of 1982. This increased the federal gasoline tax rate to 9 cents per gallon — with 8 cents going to the Highway Trust Fund and 1 cent going to the new Mass Transit Account. In 1986, 0.1 cents was added per gallon with the Superfund Amendments and Reauthorization Act.

The federal gas tax was once again increased by 5 cents in 1990 as a result of the Omnibus Budget Reconciliation Act of 1990. The Omnibus Budget Reconciliation Act of 1993 raised the tax an additional 4.3 cents, bringing the rate to 18.4 cents, where it’s remained for the last 30 years.

How much is the gas tax in the US?

The US federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel fuel. That being said, the actual fuel tax you pay will vary because each state has a separate rate.

Federal vs. state

Gas taxes are separated into two categories — the federal gasoline taxes and the gasoline tax by state. In most states, the state tax rate for fuel is lower than the federal gas tax rate.

Currently, the federal fuel tax rate is 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel.  On average, you can expect to pay about 32.61 cents per gallon of gasoline and 34.76 cents per gallon of diesel on a state level. 

As we mentioned, each state sets its own rate, which we’ll break down below.

Gasoline tax by state

Costs for gasoline tax by state are as follows:

What are gas taxes used for?

As we discussed, the gas tax was introduced during The Great Depression in an effort to help bolster the federal budget. While the gas tax was initially intended to be a temporary measure, it’s been extended and increased several times throughout history for a variety of reasons, including funding certain initiatives.

The Revenue Act of 1941 made the gas tax permanent and increased the tax rate to help pay for the US defense budget. The Revenue Act of 1951 increased the tax rate to 2 cents to provide revenue during the Korean War.

Years later, the Federal-Aid Highway Act of 1956 was passed, and the tax rate increased again. This time, the taxes from gasoline would be contributed to the Highway Trust Fund where it would be used to fund the Interstate System and other transportation projects.

President Ronald Reagan passed the Surface Transportation Assistance Act of 1982 in January 1983, increasing the tax rate but creating two separate branches of the Highway Trust Fund — the Mass Transit Account. In 1986, the tax was increased again to contribute to the Leaking Underground Storage Tank Trust Fund.

During the 1990s, both President George H. W. Bush and President Bill Clinton increased the federal gas tax to help reduce the federal deficit.

Today, gas taxes are still used to fund the Highway Trust Fund, the Mass Transit Account, and the Leaking Underground Storage Tank Trust Fund. Over time, this may change as needed.

Are there any exemptions to the gas tax?

If you have a gasoline business credit card from a qualifying oil company, you can complete a request for Exemption from Gasoline Taxes through your state department. You can apply for an exemption for each gasoline business credit card you have.

Keep in mind that there may be additional requirements to qualify for an exemption, depending on your state.

Fuel tax credit

While the gas tax can add up over the year, there are deductions you might qualify for to help you save a bit on your taxes to help make up for it. You can also directly reduce your tax bill if you qualify for a tax credit, like:

• Alternative fuel credit
• Alternative fuel mixture credit
• Biodiesel and renewable diesel credit
• Biodiesel and renewable diesel mixture credit
• Second-generation biofuel producer credit

If your vehicle meets certain criteria, you may also qualify for the Clean Vehicle Credit. 

No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.