Your Complete Guide To Fuel Taxation In The United States

Fuel taxation started getting imposed in the US when Oregan began to levy a tax on fuel on February 25, 1919. The fuel tax in 1919 was 1¢ / gallon.

On March 20, 1919, the American Petroleum Institute (API), the largest US trade association for the oil and natural gas industry, was founded with the mission to promote safety across the industry at a global level and to influence the public policy so that the laws relating to fuel can be used in favor of a feasible US oil and natural gas industry.

Today, most of the US states exempt gasoline from general sales taxes. But there are several states which still collect full or partial sales tax in addition to the excise tax. And unlike most other goods in the US, the price of gasoline includes all taxes, as opposed to inclusion at the point of purchase.

Why Fuel Taxation?

The early 20th century witnessed a boom in the automobile industry, not just in the US, but in various other countries as well. On one side, the UK introduced the petrol tax “to help pay for roads” in its 1909 finance bill, and on the other, the number of vehicles in the US increased sharply. Where in 1900, only 8,000 private automobiles were registered in the US, in 1915, the number rose to an astonishing 2.3 million.

Because cars were not built to run on uneven roads, the car owners started demanding good, smooth roads. The rise in the demand for good roads, problems in managing statute labor, and a decline in road financing led the US government to start levying fuel tax.

In the new economy, fuel tax, though increases the prices of fuel in a global petro economy, is one of the smartest ways to pay for things an economy needs to pay for, like hospitals, schools, military, etc. It surely increases the price of fuel, but it also leads to more efficient use of oil, like improvement in low-carbon technology, the establishment of fleet management software to save fuel, and boost in public transportation.

Fuel Taxation Rates

The fuel taxes shall apply to liquids sold at retail by the US or by any agency or instrumentality of the US. The fuel taxation rates in the US are :

1. The rate of tax on general buses is 7.3 cents per gallon (which will be 4.3 cents per gallon after September 30, 2022), and on school buses and intracity transportation is $0.00 per gallon.

2. In the case of diesel fuel in a train, the rate of tax imposed is $0.00 per gallon.

3. In the case of LPG (Liquefied Petroleum Gas), the tax rate shall be 18.3 cents per energy equivalent of a gallon of gasoline.

4. In the case of liquefied natural gas, the tax rate shall be 24.3 cents per energy equivalent of a gallon of diesel.

5. In the case of CNG (Compressed Natural Gas), the tax rate shall be 18.3 cents per energy equivalent of a gallon of gasoline.

6. In the case of liquid fuel derived from coal, the tax rate shall be 24.3 cents per gallon.

7. Tax on certain liquids used as a fuel in aviation shall be 21.8 cents per gallon.

Fuel Taxation Exemptions

Not all kinds of fuels are taxable. Some of them are declared exempted by the government as per their discretion.

1. No tax shall be imposed on the sale of any liquid if a tax was imposed on the same under section 408, and the tax was not refunded.

2. No tax shall be imposed on liquids sold for off-highway business use.

3. No tax shall be imposed on any liquid sold for use on a farm for farming purposes.

4. No tax shall be imposed on any liquid sold as supplies for vessels or aircraft.

5. No tax shall be imposed on the sale of any liquid for the exclusive use of any State, any political subdivision of a State, or the District of Columbia.

6. No tax shall be imposed on the sale of any liquid for export or for shipment to possession of the United States.

7. No tax shall be imposed on the sale of any liquid to a nonprofit educational organization.

8. No tax shall be imposed on the sale of any liquid to a qualified blood collector organization.

9. No tax shall be imposed on the sale of any liquid to an aircraft in an aircraft museum or to any vehicle owned by such a museum.

10. No tax shall be imposed on any liquid sold for a helicopter to provide transportation.

Future Outlook

Fuel taxation is a major source of revenue for the US government and a basic expense for its citizens. But the surge in sales of electric vehicles, encouraged by government subsidies, is a serious threat to the future of fuel taxation and a benefit to the end-users, the consumers. This phase has already started, as Tesla has allowed its consumers to charge their car free of cost at its power points.

Also, transformative technologies like AI and IoT, with the help of a safety program for fleets, will go a long way in improving fuel efficiency as well as the safety and lives of people. This is going to become the new normal, but until that day shows up in the future calendar, the fuel taxation by the government will continue.

It is estimated that the fuel tax revenue is going to decline by as much as 50% by 2040 in those states which do not adjust rates for inflation. And for the states which do adjust for inflation, the revenue will still going to decline, but only at a rate of 3-16%.

The process of not paying fuel tax (legally) has already begun, as more than a million electric vehicles have already hit the road, without any of them paying even a penny in the form of fuel tax. The concept of a road charge for electric vehicles is being tested out in several states, with Oregon at the forefront again.

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