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What is a Fuel Tax?

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  • Written By: Josie Myers
  • Edited By: Michelle Arevalo
  • Last Modified Date: 12 August 2017
  • Copyright Protected:
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    Conjecture Corporation
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Put simply, a fuel tax is a sales tax on fuel. When someone purchases fuel for their vehicle, home heating, or other such purpose, they are charged a fee beyond the cost of the fuel itself. The highest taxes are for transportation purposes, while those for home functions are generally lower. For this reason, the term fuel tax, in common usage, most often refers only to fuels used for transportation.

The money collected from a fuel tax goes into a variety of places. Some countries place it into a general fund, for use wherever the government sees fit. Others choose to use the fuel tax to fund research into alternative fuels with the hope to reduce dependence on fossil fuels. In the United States, the majority of the fuel tax is placed into transportation-related projects like road improvements and bridge repairs. It is estimated that approximately 70% of all roadway projects are funded by either federal, state, or local fuel taxes.

In the United States, a fuel tax was first introduced on a state level. Oregon was the first state to tax fuel when it introduced a $0.01 US Dollars (USD) per gallon tax in 1919. Other states would follow, with an additional federal tax of $0.01 USD per gallon beginning in 1932 under the Revenue Act of 1932. This tax was a part of President Hoover's attempt to balance a budget that had been severely strained during the Great Depression.

The initial federal tax rate remained fairly steady over the next century. At the time of this first federal tax, gasoline was approximately $0.15 USD per gallon. In 2009, the average gallon of gasoline was about $2.55 USD. The tax of $.01 USD in 1932 would therefore be equal to approximately $0.17 USD per gallon in 2009. The actual federal tax rate at that time was $0.184 USD, which is not very far removed from the original rates.

The overall fuel taxes that each Amercian individual pays depends largely on their state of residence. Each state has a tax above the given federal rate, with some nearing a total of triple that of the federal alone. Within the states, some local governments also charge a tax on fuel sold in their municipality.

Besides taxes on automotive fuel, there are other forms of transportation that can pay a fuel tax as well, most notably the airline and rail industries. The cost of these taxes can cause ticket prices to rise and fall. It has been suggested by environmental activists that governments manipulate the taxes to encourage public transportation and cleaner forms of transportation, like trains.

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