5 States Taxing Your Gas to Death

America's drivers have finally started to get some real relief at the pump. According to Bloomberg, gas prices fell 6.8% in March, the biggest drop since November. AAA is reporting that the average gas price in the States is $3.56 per gallon, about $0.35 cheaper than this time last year. Unfortunately, the relief may be short-lived. America's crumbling transportation infrastructure is screaming for higher funding, and many states are initiating tax hikes. Today we'll look at the states with the highest tax rates on gasoline, and the strategies that some states are employing to remedy budget shortfalls.

The highest taxes in the land
The federal government taxes gasoline at a rate of $0.184 per gallon, but the total tax burden at the state and local level is often much, much higher than that. California takes first place for the highest state taxes on gasoline. The chart below shows the rest of the top five, but data for every state can be found here.

Rank

State

Rate

1

California

$0.69

2

Hawaii

$0.67

3

Connecticut

$0.63

4

Indiana

$0.59

5

Illinois

$0.58

Source: American Petroleum Institute 

There are some states that have already started raising taxes on gasoline. For example, Maryland plans to increase its gas taxes by $0.13 to $0.20 over the next three years.

Virginia Governor Bob McDonnell abolished his state's gasoline tax altogether, generating the estimated $844 million to repair roads and bridges by raising its sales tax, and imposing a tax on wholesale fuel. The state has given local governments the ability to raise their taxes.

One important aspect of Virginia's new 3.5% wholesale tax is that it is tied to inflation. A major problem with gas taxes at both the state and federal levels is that they are not tied to inflation, and therefore have had no chance of keeping up with rising repair costs. Maryland will also tie taxes to inflation from this point forward.

A bigger problem
States will do what they can, but there is a larger problem looming in the world of gas taxes. The federal gas tax hasn't increased since 1993. Given the rate of inflation, that $0.184 per gallon of gas has lost about 40% of its purchase power from 20 years ago. The U.S. Chamber of Commerce is clamoring for increasing the tax and tying it to inflation. It is estimated every one-cent increase generates $1.8 billion in revenue. That is much-needed revenue, given that the Department of Transportation estimates 15% of our nation's roads are in unacceptable condition.

Foolish takeaway
Some 19 states are making plans for gasoline tax increases, including Iowa, Texas, and Michigan. The plans range from increases as little as a quarter of a penny in Minnesota to $0.10 in Wyoming. You can track the different plans here. Ultimately, even if the world price of oil falls, our gas prices are likely to rise.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2013, at 9:53 PM, neamakri wrote:

    I live in Texas. Sure the gas tax is lower BUT roads need repair, AND new roads being built are TOLL roads.

    I would rather pay more at the pump and get better, free, highways.

  • Report this Comment On April 15, 2013, at 12:00 AM, herky46q wrote:

    If the money goes directly to repair roads in need of it, nobody should be alarmed by it.

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