What is Motor Fuel Tax?

A motor fuel tax is a form of sales tax, which is imposed on the sale of fuels such as gasoline, jet fuel, and diesel, and others that are used for transportation. Agricultural and heating fuels are taxed at a lower rate than motor fuels. Motor fuel tax rates are, in general, significantly higher when compared to conventional sales taxes, and are sometimes called excise taxes to distinguish between the two.

In most cases, the purpose of implementing a motor fuel tax is to pay for road construction and repairs, as well as snow removal in areas with cold winters. The idea behind this is that the more the roads are used, the more repairs will be needed. Motor fuel tax revenues directly reflect the amount of road usage, since fuel must be purchased in order to use roads.

As is the case with many taxes, fuel taxes can also be used as a way of incentivizing consumer behavior. In other words, consumers have an incentive to use less fuel or look for alternative fuel when motor fuel is taxed. Taxes on fuel have been used and advocated as a way to reduce pollution, control dependence on imported energy, and to encourage conservation. Differences in the motor fuel tax between countries in the same region sometimes create the unintended consequence of cross-border purchasing of motor fuel. Additional policies must then be implemented which remove the incentive to buy the foreign motor fuel.

A motor fuel tax, like any sales tax, is charged at the point where good or services are purchased. It is intended to be universally implemented and difficult to avoid. Fuel taxes are generally charged based on the amount purchased, rather than the price. For instance, gas taxes are charged as a certain value per gallon (or liter) purchased, rather than as a percentage of the total purchase price. This is done so that tax revenues do not fluctuate in line with changes in fuel prices, which can sometimes be dramatic and rapid.

The first motor fuel tax to be enacted in the United States was in 1932, when the U.S. Congress enacted an excise tax on gasoline. The tax at the time was one cent per gallon (3.8 liters). It has been raised incrementally many times since then, such as on 1 October 1993, when it was raised from $0.14 U.S. Dollars (USD) per gallon to $0.184 USD per gallon. Before 1983, all federal gasoline tax revenues were used for building and maintaining federal highways. Since then, revenues have also been allocated toward mass transit and other uses.