(Last updated: November 2018)
Several Different Taxes Affect Gasoline Prices. Many people refer to “the gas tax” when talking about transportation taxes and fees. Typically, people mean the state excise tax on gasoline (the charge levied on a per gallon basis) because this is the primary source of state funding for highways and roads. However, federal excise taxes and state and local sales taxes (levied on the price) also apply to gasoline in California. (Various state, federal, and local taxes also are placed on diesel fuel.) The figure below shows how much a driver pays for each tax when purchasing a gallon of gasoline costing $3.70 (the average gasoline price in California at the time this analysis was prepared). In this example, the taxes make up about 20 percent of the price, with the state excise tax accounting for over half of all the taxes paid.
As shown in the figure, the specific taxes on gasoline include:
State Excise Tax (41.7 Cents Per Gallon). The state charges this tax to gasoline suppliers before they deliver gasoline to retail stations. However, research indicates that most, if not all, of the tax is passed along to drivers through higher prices at the pump. Because the tax is set per gallon, the amount of tax paid depends only on the number of gallons of gasoline a driver purchases, irrespective of the price of each gallon.
Federal Excise Tax (18.4 Cents Per Gallon). In addition to the state excise tax, California drivers pay a federal excise tax on gasoline. This tax works similarly to the state excise tax—that is, the tax is not paid directly by drivers though it does increase gasoline prices they pay at the pump.
State and Local Sales Tax (3.5 Percent, on Average). Sales taxes are set as a percent of the price of gasoline. Unlike excise taxes, drivers are charged these taxes directly at the pump, although gasoline stations include the tax in the prices they advertise. The current average state and local sales tax rate on gasoline is 3.5 percent, though the rate can vary from as low as 2.55 percent to as high as 5.25 percent depending on the locality. (The sales tax on gasoline in California is notably lower than the sales tax on most other goods—which averages 8.5 percent—mainly because gasoline is exempt from the portion of the sales tax that supports the state General Fund.)
Storage Fees and Other State Policies and Programs Also Affect Gasoline Prices. In addition to the taxes described above, the state levies a fee of 2 cents per gallon on owners of underground storage tanks that contain petroleum. The state also has other programs and regulations that affect gasoline prices. For instance, the state’s cap-and-trade program affects gasoline prices because it requires fuel suppliers to purchase permits that cover the greenhouse gases emitted when the fuel is burned. We estimate that this currently adds 12 cents per gallon to the price of gasoline. The state also has a low-carbon fuel standard program that requires suppliers of high-carbon fuels (such as gasoline) to purchase credits from supplier of low-carbon fuels (such as natural gas). We estimate that this currently adds 10 cents per gallon to gasoline prices.
State Excise Tax Pays for Highways and Roads. In 2018‑19, the state gasoline excise tax is set at 41.7 cents per gallon and the tax is expected to raise $6.1 billion from gasoline purchases for vehicles using public roads. In effect, the 41.7 cent tax consists of three distinct components, each of which has its own allocation formula set forth in state law. The figure below shows each of the formulas.
As shown in the figure, the state excise tax on gasoline consists of the following:
Base Tax. In 2018‑19, this part of the excise tax equals 18 cents per gallon and is expected to raise $2.6 billion. Two-thirds of this revenue is deposited into the State Highway Account to pay for state highway maintenance, rehabilitation, and related administration. The remaining one-third of the revenue is provided to cities and counties to pay for their local streets and roads.
Swap Tax. In 2018‑19, this part of the excise tax equals 11.7 cents per gallon and is expected to raise $1.7 billion. First call on these revenues is to “backfill” the State Highway Account for truck weight fee revenues that have been redirected in recent years from the State Highway Account to instead pay for transportation bond debt service. In 2018‑19, this amount equals $1.1 billion and is available for highway maintenance, rehabilitation, and related administration. The remaining revenues are allocated as follows (1) 44 percent to cities and counties for their streets and roads; (2) 44 percent to the State Highway Account for the State Transportation Improvement Program, which mainly funds highway and roadway capacity expansions; and (3) 12 percent to the State Highway Account for the State Highway Operation and Protection Program, which mainly funds state highway rehabilitation projects.
Senate Bill 1 Tax. In 2017, the Legislature enacted a 12 cent per gallon excise tax as part of a larger package of tax and fee increases to increase funding for transportation. In 2018‑19, this tax is expected to raise $1.8 billion. All of the associated revenues is deposited into the Road Maintenance and Rehabilitation Account. This account mainly pays for state highway and local road maintenance and rehabilitation, though a small portion can pay for transit and other transportation programs too.
State Excise Tax Also Pays for a Few Other Programs and Costs. Not counted above or shown in the figure is an additional $370 million in state gasoline excise tax revenues. Most of these revenues come from gasoline purchases for off-highway vehicles, agricultural vehicles, boats, and aircraft. The state does not spend these funds on highways and road programs since these vehicles do not use this infrastructure. Instead, the state dedicates these revenues to the General Fund, state parks (for general park purposes, off-highway vehicle programs, and boating programs), agricultural programs, and aeronautics programs. In addition, a small portion of state gasoline excise tax revenues pay for the costs associated with collecting and distributing the revenues.
Federal Excise Tax Pays for Highways and Transit. The federal government dedicates about 85 percent of federal gasoline excise tax revenues to highways, with the remainder primarily supporting transit. The federal government distributes the associated revenues to states through various highway and transit grant programs.
State and Local Sales Taxes Pay for Various Local Programs. Revenues from sales taxes on gasoline are allocated in the same manner as revenues from sales taxes applied to most other goods (except gasoline is exempt from certain portions of the sales tax). These revenues pay for various city and county programs, including transportation programs.
State Excise Tax and Sales Taxes. The state excise tax and sales taxes on gasoline have a connected history. The figure below shows the major changes to these taxes over roughly the past 90 years.
Below, we summarize how certain gasoline taxes have changed over time.
Base Excise Tax. In 1923, the state created a 2 cent per gallon excise tax to pay for road and highway maintenance. It then increased the rate periodically over the next several decades to increase funding for roads and highways. In 1990, voters passed Proposition 111, which doubled the rate from 9 cents per gallon to 18 cents per gallon.
Swap Excise Tax and Sales Taxes. In 1933, the state established a sales tax on tangible goods but exempted gasoline. In 1971, the state extended the sale tax to gasoline, with most of the associated revenues going to the state General Fund. In 2000, the state began redirecting gasoline sales tax revenues from the General Fund to pay for various transportation programs. Then, in 2010, the state enacted a tax “swap” in order to have more flexibility over how it could spend these revenues. Specifically, the state eliminated the portion of the sales tax on gasoline that had been redirected from the General Fund to transportation programs (a 5 percent sales tax rate) and replaced it with an equivalent excise tax (at that time, 17.3 cents per gallon). Each year since then, the state has adjusted the swap excise tax rate to raise an equivalent amount of revenue as would have been raised by the 5 percent sales tax it eliminated. Currently, the swap excise tax rate is set at 11.7 cents per gallon. The portion of the sales tax that historically did not go to the General Fund (which currently averages 3.5 percent statewide) still applies to gasoline.
Senate Bill 1 Tax. As part of a larger transportation funding package, this legislation imposed a new 12 cent excise tax, on top of the 18 cent base excise tax last increased in the early 1990s by Proposition 111. In addition, the legislation, starting in 2019, converts the swap excise tax created in 2010 into a fixed excise tax set at 17.3 cents per gallon (the rate in effect when the swaps excise tax was created). The legislation also adjusts each of the three excise taxes for inflation moving forward.
Federal Excise Tax. In 1932, the federal government imposed a 1 cent per gallon excise tax on gasoline to help reduce the federal deficit. It subsequently increased the rate by another cent during the 1940s and 1950s to help pay for World War II and the Korean War. In 1956, the federal government increased the rate to 3 cents and dedicated all the revenues to the construction of the interstate highway system. The next major change occurred in 1983, when the federal government increased the rate to 9 cents and began to use a portion of gasoline excise tax revenues for transit programs. In the early 1990s, the federal government again increased the rate on two occasions to help reduce the federal deficit, though within a few years it had redirected all the revenues back to highway and transit programs. In the 25 years since that time, the federal excise tax rate has remained at 18.4 cents.