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Time to Rethink Tax Policy for Diesel Fuel

Paying for fuel to power our cars is never fun, especially when the price skyrockets quickly and comes back down oh so slowly. As we scan the different stations looking at the prices, taking in a momentary gasp, and then finally picking a station and filling up, we rarely think about the taxes that we pay on the fuel that are incorporated into the price at the pump. Well, it’s time to think and rethink because those taxes have an effect on what type of car we buy.

Generally, there are two different taxes: 1) Federal level tax and 2) state level tax. The revenue collected by the governments are used to help pay for maintenance and development of highways, roads, bridges, and a small portion is directed to help pay for public transportation maintenance and development.

At the Federal level, the tax on gasoline is 18.4 cents per gallon and 24.4 cents per gallon for diesel. At the state level, there are varying levels for both gasoline and diesel. In many states, the tax on gasoline is lower than the tax on diesel (See map from Tax Foundation below), though the average across all states for diesel is higher according to the Energy Information Administration. As of July 1, 2013, seven states increased their diesel tax. Wyoming increased the tax on diesel by 10 cent per gallon.

The differential in taxes between gas and diesel at the Federal level owes its origins to the trucking industry. The trucking industry is burdened with both the tax on diesel fuel as well as a heavy vehicle use tax. During the 1980’s, Congress recognized that the heavy vehicle use tax “would impact trucking operations which did not necessarily relate to the amount of business they might do.” To counteract this possibility, Congress decided to reduce the heavy vehicle use tax together with an increase in the diesel fuel tax. At that time, Congress also provided a diesel fuel tax credit to purchasers of light vehicles between January 1, 1985 and December 31, 1987.

Why the discussion about legislative history? Today, clean diesel vehicles are on average 18% more fuel efficient on the highway than their gasoline counterparts. Clean diesel vehicles are also cleaner and are designed to meet the strictest emissions standards. All this comes at a slight premium over their gas counterparts. When the premium on the vehicle and higher taxes are combined, the value proposition to consumers of driving longer distances between refueling is often clouded. Policymakers need to rethink how diesel fuel is taxed and let the market decide. It is clear that diesel powered cars have become cleaner, more fuel efficient, and fun to drive, but should they be burdened by history?

Walter Wang is Managing Editor of CleanTechies. Follow Walter on Twitter: @energytaxprof