Why Does an Excise Tax on Gasoline Exist?

If you’ve ever looked at your gas receipt and wondered why gas prices seem to include more than just the fuel itself — you’re not alone. Part of the price you pay at the pump is a tax, and it’s not just any tax — it’s something called an excise tax.

Excise taxes are everywhere, and gasoline is one of the most common items they’re placed on. But why? Why does an excise tax on gasoline exist in the first place?

In this blog, we’ll break down what gasoline excise taxes are, how they work, their history, the reasons behind them, and what the future might look like. We’ll keep things simple and help you understand how this hidden part of your gas bill impacts roads, budgets, the environment — and you.

What Is an Excise Tax on Gasoline?

An excise tax is a type of indirect tax. That means it’s not directly paid by you to the government, like income tax. Instead, it’s charged on specific goods, often at the time they’re made or sold. Gasoline, cigarettes, and alcohol are all common targets of excise taxes.

Unlike a sales tax, which is added to most purchases and is usually a flat percentage, an excise tax is more focused. It’s aimed at certain goods, often for specific reasons — like health, the environment, or funding public services.

So, when it comes to gasoline, excise taxes are built into the price. You don’t see them as a separate line at checkout, but they’re there — and they’re doing more than you might think.

How Excise Tax on Gasoline Works

There are two common ways gasoline excise taxes are calculated:

• Per-gallon tax: A set amount is added for every gallon sold (e.g., 18.4 cents per gallon in the U.S. at the federal level).
• Percentage-based tax: Some places apply a tax as a percent of the sale price.

In the U.S., we have both federal and state gasoline taxes. The federal government charges a flat fee per gallon, while each state adds its own tax on top. Some states also allow local governments to add more.

But who really pays the tax?

Technically, the tax is first paid by distributors or retailers. But in practice, the cost is passed on to you — the consumer. Every time you fill up, you’re helping fund roads, infrastructure, and more through that excise tax.

Historical Context of Excise Tax on Gasoline

Explore the historical context of the excise tax on gasoline:

Origins of Gasoline Taxation

The idea of taxing gasoline isn’t new. In the U.S., the first federal gas tax was introduced in 1932, during the Great Depression. At just 1 cent per gallon, the goal was to raise funds for struggling public programs.

Soon after, it became clear that gas taxes could help pay for something else Americans desperately needed: better roads. Cars were becoming more common, and highways were popping up everywhere. Gasoline taxes became a tool to fund that growth.

Evolution Over Time

Over the years, the gasoline tax has grown — but not always fast enough. Adjustments were made for inflation, changing transportation needs, and political decisions.

While it started as a way to build roads, today the money often goes beyond transportation. In many places, it helps fund schools, public transit, or even general government spending.

Key Reasons for Gasoline Excise Taxes

Here are the reasons for the excise tax on gasoline:

Funding Transportation Infrastructure

This is the main reason gasoline taxes were introduced, and still the biggest use of the money.

• Roads, bridges, and highways need constant repair and maintenance.
• Some regions also use gas tax revenue to support public transit systems.

Without this steady stream of money, our daily commutes and delivery trucks would face serious problems.

Environmental and Public Health Goals

Governments also use gas taxes to push people toward more eco-friendly behavior.

• Higher gas prices can discourage overuse of cars and reduce pollution.
• This lines up with carbon tax strategies, which charge more for using fuels that harm the planet.
• It also helps promote fuel-efficient cars and electric vehicles (EVs).

In short, gas taxes can nudge people to make choices that are better for the air we breathe.

Revenue Generation for Government Budgets

Another big reason the excise tax on gasoline exists is because it’s a reliable source of income.

People need to drive, so gasoline use is fairly steady. That means gas taxes are a predictable stream of money for government budgets.

Some governments use these funds strictly for transportation. Others put them into the general budget — helping pay for schools, police, and other services.

Economic and Behavioral Incentives

Gas taxes can also shape our habits.

• If gas is expensive, people might drive less, reducing traffic congestion.
• It also encourages carpooling, biking, and using public transportation.

So while it’s a tax, it’s also a way to guide behavior toward healthier, more efficient choices.

How Gasoline Excise Taxes Are Calculated

Learn how to calculate gasoline excise taxes are calculated:

Federal vs. State Taxes (U.S. Example)

In the U.S., the federal gasoline tax is 18.4 cents per gallon (since 1993). Diesel is taxed at a slightly higher rate.

But each state adds its own gas tax — and the rates vary a lot:

• California has one of the highest gas taxes.
• Alaska has one of the lowest.

Some states also have sales taxes or environmental fees on top of the excise tax.