Demystifying Motor Fuel Taxes

As Illinois’ leaders debate freezing taxes on gasoline and diesel, here’s your guide to the esoteric world of state, local, and federal motor fuel taxes.

Motor fuel taxes have been in the news recently: In his combined State of the State and Budget address, Gov. J.B. Pritzker proposed freezing the automatic inflation-adjusted increase in the state motor fuel tax of 2.2 cents per gallon scheduled for July 1. There’s also a case in the Illinois Supreme Court that’ll determine the permissible uses for local taxes on motor fuel. Meanwhile, in Washington, D.C., Congress has been discussing suspending federal motor fuel taxes to counteract quickly rising prices of gasoline and diesel fuel.

The taxation of gasoline and diesel fuel consists of a series of “stealth” taxes. That is, when you purchase fuel at the pump, you see the total price per gallon inclusive of a variety of taxes with no readily available breakdown. The purpose of this column isn’t to opine as to whether the motor fuel tax burden is good or bad—that’s a debate for another day. Rather, I seek to decode a tax that’s largely invisible to most people, including tax practitioners who don’t deal routinely in the specialized and arcane area of motor fuel taxes.

The taxation of motor fuel is a complex combination of federal, state, and local taxes imposed at the wholesale and retail levels. According to the Illinois comptroller, $2.4 billion in motor fuel taxes were administered and collected by the state during the fiscal year that ended June 30, 2021. The Illinois General Assembly’s Commission on Government Forecasting and Accountability estimates that the state’s portion of the sales taxes on motor fuel will generate approximately $700 million during the current fiscal year. This figure doesn’t include the local or federal portions of the sales taxes. Whether the taxes are imposed and paid at the wholesale or retail level, the taxes are ultimately paid by consumers when they make a purchase at the pump.

The tax rates also differ between gasoline and diesel fuel. The United States imposes a federal excise tax of 18.4 cents per gallon of gasoline and 24.4 cents per gallon of diesel fuel. At the state level, Illinois currently imposes a tax of 39.2 cents per gallon of gasoline and 46.7 cents per gallon of diesel fuel, subject to an automatic inflation adjustment each July 1. Other state taxes imposed on motor fuel include an underground storage tank tax of 0.3 cents per gallon, an environmental impact fee of 0.8 cents per gallon, and 1.1 cents per gallon for funding Illinois’ Underground Storage Tank Fund.

There may also be local motor fuel taxes. In Cook County, an additional 6 cents per gallon tax is imposed, and Chicago assesses an additional 8 cents per gallon tax. In DuPage, Kane, Lake, and McHenry counties, there’s an additional 4 cents per gallon tax, and these counties have the legal authority to increase their county motor fuel taxes up to 8 cents per gallon. Legislation enacted in 2019 also authorized Lake and Will counties to impose a county gas tax of up to 8 cents per gallon. Any city of over 100,000 in population has the statutory authority to impose a city tax of 1 cent per gallon if the tax is approved by a voter referendum.

In addition to the federal, state, and local motor fuel taxes, gasoline is subject to state and local sales taxes on the retail sale of gasoline. The basic state sales tax is 6.25 percent. There are also numerous locally imposed sales taxes administered and collected by the Illinois Department of Revenue, depending on the location of the sale. For example, a sale of gasoline in Springfield is subject to additional local sales taxes of 3.5 percent for a total sales tax of 9.75 percent.

Combining all these taxes (and taking an average tax rate for the sales taxes), the American Petroleum Institute (API) determined that the average amount of taxes on a gallon of gasoline in Illinois is 78 cents per gallon—a tax burden beat out only by California’s 86.55 cents per gallon. The API reports the national average is 57.09 cents per gallon.

Diesel fuel is subject to the same array of federal, state, and local taxes in Illinois, although as noted above, the federal and state motor fuel taxes are imposed at a higher rate per gallon on diesel fuel. According to the API, the average rate of taxes per gallon of diesel fuel in the United States is 64.64 cents per gallon compared to 91.42 cents per gallon in Illinois. Illinois has the third highest total taxes per gallon on diesel fuel, trailing California at $1.24 per gallon and Pennsylvania at 99.6 cents per gallon.

At the time of writing this column, the governor hasn’t provided details or legislative language for his proposed suspension of the automatic inflation increase, but to implement a suspension, the law must be amended. The governor has received criticism of his proposal from road builders and unions, as state and federal motor fuel taxes are earmarked for road construction and maintenance. In fact, a 2016 amendment to the Illinois Constitution states that motor fuel taxes can be used for nothing but transportation infrastructure and operation. The scope of the constitutional limitation as it applies to local taxes is currently the subject of litigation before the Illinois Supreme Court in Illinois Road and Transportation Builders Association v. County of Cook.

It's unclear whether the governor’s proposed suspension of the 2.2 cents per gallon increase would be for the upcoming fiscal year beginning July 1, 2022, only, delaying the increase until July 1, 2023, when it would take effect along with any additional inflation adjustment based on inflation this year, or whether this year’s increase would be permanently eliminated. The answer to this question makes a material difference in motor fuel tax rates and receipts going forward.

As we await rulings from legislative and judicial bodies, I hope this column helps to decode the complexities of the existing tax structures they may modify.