What is a Fuel Sales Tax?

A sales tax is a tax paid directly by the buyer of a product and is usually based upon a percentage of the item’s price. An excise tax has a set amount for a certain measurement or unit of an item, and does not increase or decrease when the price fluctuates. The fuel sales tax paid at the pump is actually an excise tax or a combination of an excise tax and a sales tax charged by the federal, state, and local governments.

In the United States, the federal government imposes an excise tax per gallon on gas, diesel, gasohol and jet fuel. In addition, the states impose taxes based upon either a flat amount or a percentage. In many jurisdictions, additional taxes are added by the city or county. The federal government charges slightly less for diesel than gas, and substantially less for gasohol. Individual states vary, however, and some charge more for diesel, while others either tax all kinds of fuel equally or only offer discounts for alternative fuels.

The federal government in Canada charges three taxes on fuel: an excise tax which has a set amount per liter, and two sales taxes, the goods and services tax (GST) and the harmonized sales tax (HST). It does eliminate the excise tax on heating fuel. In addition, provinces and municipalities are given freedom to add their own excise tax or fuel sales tax. Many countries, including Canada and the US, impose additional fuel taxes on large transport vehicles.

Gas prices in European Union countries are substantially higher than prices in North America for two reasons: supply and taxation. Most EU countries, with the exception of the UK and Switzerland, place a lower fuel sales tax on diesel than on unleaded gasoline. The UK charges two taxes; the federal fuel sales tax, or excise tax and the value added tax (VAT) which is added to the pump price. Substantially lower tax is assessed on alternative fuels such as natural gas, ethanol and biodiesel fuel.

Fuel sales tax is a method used by governments to try to direct behavior, such as discouraging the use of personal vehicles through high taxes or encouraging conversion to more environmentally friendly alternatives with lower tax incentives. The primary purpose of these taxes, however, is to capture revenue. In most jurisdictions, the federal fuel sales tax goes into the general revenues, with a portion allotted to building and maintaining roads. States, provinces and local jurisdictions may pass legislation restricting the use of such funds to specific purposes, such as road construction, upgrading public utilities, funding mass transit projects, and energy research and development.

Regions which are dependent upon gas or oil for heating purposes generally charge a fuel sales tax on that product as well, though some areas have sought to reduce or eliminate this tax because of the disproportionate burden it can cause on lower income households. A commuter can sometimes use alternatives such as carpools and mass transit to avoid increased fuel costs, but a person with limited income may have no other option than to use oil or gas for heating purposes. People with lower incomes cannot generally afford to install solar panels or wind turbines to supplement the heating systems in their homes and ultimately lower heating costs.