Variable Rate Gas Taxes

4/11/2019

Introduction

All 50 states, Washington, D.C., and the federal government levy some form of a gasoline tax. Most commonly these taxes are structured as a fixed cent-per-gallon rate. However, 22 states and D.C. have a variable-rate gas tax that adjusts, to some degree, with inflation or prices without regular legislative action. According to the Institute on Taxation and Economic Policy (ITEP), these states account for a majority of the nation’s population.

The federal gas tax of 18.4 cents per gallon has not been increased since 1993 and at least 11 states have gone longer than that since raising their own gas tax.

In many states, gas tax revenues are not keeping up with the transportation funding needs of the state. The weaknesses of a per gallon gas tax are well understood—as vehicles become more efficient, they will require less gasoline per mile. At the same time, younger generations are driving less than previous ones. States are also feeling a pinch from rising costs for transportation projects, the Congressional Budget Office reports that even as nominal spending on infrastructure has risen 44 percent since 2003, real spending is down nine percent

Recent Action

Since 2013 31 states have enacted legislation to increase their state gas taxes. Many of these states have recognized the potential issues with a fixed-rate tax and have utilized a range of approaches to create, what many transportation experts hope will be, a more sustainable revenue source. Included in these approaches are a variety of variable-rate gas tax structures.

Forms of Variable-Rate Taxes

Examples of variable-rate gas taxes used by states include:

  • A percentage tax on either the wholesale or rack price of gasoline. Proponents argue that this structure will allow for increased tax revenues as inflation causes gas prices to increase. Conversely, states will also see decreased revenues as gas prices drop and the volatile price of oil can create problems for long-term revenue forecasting.
    • In 2015, Kentucky and North Carolina adjusted their percentage based gas taxes in response to dramatic decreases in revenues due to falling gas prices.
    • Similarly, California has recently introduced legislation to increase its gas tax as a result of decreased revenues due to the falling price of gasoline.
  • Other approaches utilized by states include:
    • Statutory provisions to automatically adjust a cent-per-gallon tax to the consumer price index (Florida, Maryland, North Carolina and Rhode Island);
    • Tying the gas tax to a state’s inflation (Michigan); or
    • Linking the gas tax to other metrics such as population (North Carolina) or appropriation decisions (Nebraska).
  • Hawaii, Illinois and Indiana apply the state’s general sales tax to gasoline and therefore revenues are affected by prices.
  • In 2015, Georgia became the first state to enact legislation linking its gas tax to the efficiency standards of motor vehicles, potentially alleviating any lost revenue because of more fuel-efficient cars.
  • Nevada's gas tax is not indexed statewide, but the gas taxes in Clark and Washoe counties are indexed. The Nevada legislature allowed voters to vote on whether to index their gas taxes, with Clark and Washoe counties being the only ones to choose to index. 

The chart below lists the tax rate, structure and year of last legislatively imposed increase for the 22 states and D.C. with variable-rate gas taxes.

States with Variable Gas Taxes
State Gas Tax Structure Year of Last Increase
Alabama Tax indexed annually to the National Highway Construction Cost. 2019
Arkansas Tax based on the average wholesale price of gas and diesel, with a floor (prevents the tax from dropping if the 12-month average wholesale price of fuel is less than the previous year) and a ceiling (limits the increase to no more than 0.1 cent-per-gallon per year).  2019
California Tax varies with inflation. 2017
Connecticut Tax varies with gas prices. 2013
Florida Tax varies with Consumer Price Index (CPI). 2015
Georgia Tax varies with vehicle fuel-efficiency and CPI. 2015
Hawaii Variable rate only because general sales tax applies to gas. **
Illinois Variable rate only because general sales tax applies to gas. **
Indiana Tax varies with inflation and general sales tax applies to gas. 2017
Kentucky Tax varies with gas prices. 2015
Maryland Tax varies with gas prices and CPI. 2015
Michigan Tax varies with inflation rate. 2017 (per 2015 legislation)
Nebraska Tax varies with gas prices and legislature's spending decisions 2016
New Jersey Tax varies with gas prices and revenue collection. 2016
New York Tax varies with gas prices. 2013
North Carolina Tax varies with population and CPI. 2015
Pennsylvania Tax varies with gas prices. 2015
Rhode Island Tax varies with Consumer Price Index (CPI). 2015
Utah Tax varies with gas prices and CPI. 2017
Vermont Tax varies with gas prices. 2015
Virginia Tax varies with gas prices. 2015
West Virginia Tax varies with gas prices. 2017
D.C. Tax varies with gas prices. 2009