Variable Rate Gas Taxes

8/31/2020

Introduction

gas tank fill-up

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 Washington, 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 (CPG) has not been increased since 1993 and at least eight 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 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% since 2003, real spending is down 9%.

Recent Action

Since 2013, 31 states and Washington, D.C., have enacted legislation to increase their state gas taxes. Many of these states recognized the potential issues with a fixed-rate tax and have used 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—the price at which refineries sell their gas to clients. Proponents argue that this structure will allow for increased tax revenues as inflation causes gas prices to increase. Conversely, states will also experience 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.
  • Statutory provisions to automatically adjust a CPG tax to the consumer price index (CPI) (Florida, Maryland, North Carolina and Rhode Island).
  • Tying the gas tax to a state’s inflation (California and Michigan). For example, in California, beginning July 1, 2020, the gas tax is adjusted according to the state CPI. The first increase was based on the CPI increase from Nov. 1, 2017, to Nov. 1, 2019, and subsequent adjustments will occur annually and be added to the associated rate for that year. The amount of the increase is the percentage equal to the increase in the California CPI, which is calculated by the state Department of Finance and rounded to the nearest one-tenth of 1 cent (1 CPG).
  • Linking the gas tax to other metrics, such as population (North Carolina) or appropriation decisions (Nebraska).
  • In 2020, Virginia expanded its wholesale fuel tax to apply statewide and also changed the formula from a percentage basis to a fixed CPG rate adjusted to annual changes in the CPI.
  • 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 by county to decide 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 structure and year of the last legislatively imposed increase for 22 states and Washington, D.C., with current 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 .1 CPG). 

2019
California Tax varies with inflation. 2020 (per 2017 legislation)
Connecticut Tax varies with gas prices. 2013
Florida Tax varies with CPI. 2015
Georgia Tax varies with vehicle fuel-efficiency and CPI. 2015
Hawaii Variable rate only because general sales tax applies to gas. **
Illinois Tax varies with CPI.  
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. 2013
Michigan Tax varies with inflation. 2022 (per 2015 legislation)
Nebraska

Tax varies with gas prices and appropriation 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 CPI. 2015
Utah Tax varies with gas prices and CPI. 2015
Vermont Tax varies with gas prices. 2015
Virginia Tax varies with CPI. 2020
West Virginia Tax varies with gas prices. 2017
D.C. Tax varies with CPI.  2020