U.S. Diesel Fuel Taxes by State | Impacts on Transportation Costs

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Diesel tax variance by state is one of the biggest determinants of regional price distortion facing shippers’ transportation networks. Taxes themselves, rate structures, and different regulatory efforts that guide these variables create complexities not accounted for in legacy reimbursement programs.

What is the Purpose of Diesel Fuel Taxes?

Federal, state, and local governments rely on fuel taxes to fund construction, repair, and maintenance of road infrastructure. By taxing the fuels necessary to utilize roads and highways, they create a largely self-sustaining program. Infrastructure deterioration has become a nationwide problem, with pressure to silence these concerns infiltrating policy discussions among some of the country’s most powerful offices.

A large-scale infrastructure bill intended to revamp the U.S.’ surface transportation framework, however, has received mixed government support. The significant resources needed to enact it proved to be a detriment. As a result, many state governments continue to do their part in maintaining their own infrastructure, setting the stage for more frequent state tax increases in recent years.

How are Diesel Prices Affected by Taxes?

The rate in which states have adjusted fuel taxes has grown in correlation with improvements in vehicle fuel efficiency. Improvements in fuel economy have reduced the number of gallons purchased, inherently equating to fewer tax funds. This decrease requires higher tax rates to balance the deficit. The steady adoption of more alternative energies has also displaced a portion of gasoline and diesel demand, giving legislators reason to adjust fuel taxes more often.

States have begun testing alternative ways to obtain tax revenue that differs from traditional per-gallon taxation. Utah and Washington started to explore the possibility of mileage-based taxes to eliminate the previously mentioned risks that negatively impact revenue, but a per-gallon federal and a state-level diesel tax, together, remain common practice, but differences across state lines make fuel taxes anything but a one-size-fits-all mechanism.

The maps above highlight the wide range of diesel taxes throughout the country. The map on the right illustrates how much tax makes up in the final cost of each state’s wholesale diesel price. Depending on geography, per-gallon taxes can range by as much as 60-65 cents per gallon and account for upwards of 25 percent of diesel prices at the pump (based on average price and tax data collected from January 2020).

Diesel Fuel Tax by State: Recent Tax Changes

State budget proposals at the beginning and middle of each calendar year make January and June the most common months for diesel tax adjustments. The magnitude of diesel tax changes on January 1 was below recent year trends, even though more states made changes. The most recent round of diesel tax changes saw no state exceed a change of more than two cents per gallon.

Oregon and Utah were the only states that enacted changes tied to recently passed legislation. Kansas and Washington reinstated environmental fees that naturally lifted per-gallon taxes, while Florida, Georgia, North Carolina, Nebraska, and New York saw tax fluctuations based on either percentage or inflation-based tax structures. Utah also enacted a bill to add sales tax to fuel purchases starting in April, but a grass-roots campaign to halt this amendment is underway.

Diesel Fuel Taxes by State: Not All Programs are Created Equal

Some states have also instituted carbon pricing mechanisms that add a premium to fossil fuel consumption. Member states of the Transportation Climate Initiative (TCI) in the northeast have laid out plans for a future carbon trading system, with the goal of rolling out a carbon pricing strategy later in 2020.

California is the most progressive state in taking carbon-related efforts, with its Low Carbon Fuel Standard (LCFS) program adding to the cost of diesel to, in turn, deter its purchase and align to the state’s carbon reduction targets. California’s LCFS recently made its annual carbon intensity adjustment, adding about 3.4 additional cents to each gallon of diesel for 2020 (shown in the chart below).

California’s carbon fee alone now surpasses some states’ standard per-gallon diesel tax. This reinforces the differences in tax construct throughout the U.S., the varying objectives of each states’ tax legislation, and the sheer financial implications of tax as its own input in the price of diesel fuel.

Carbon pricing mechanisms have become a reality and have shown signs of early growth nationwide, while percentage, inflation, and the introduction of mileage-based taxes add to the tax distortion that exists throughout the country.  This moving target can, however, create opportunities for shippers interested in avoiding some of this tax cost because of the benefits of alternative energy types and intermodal conversion that mitigate exposure to traditional over-the-road diesel taxes.

Diesel fuel taxes will remain an integral part of regulatory focus and state finances so long as traditional fossil fuels retain the lion’s share of the market relative to alternative energies. Their more frequent and noticeable change is arguably justified, but the regional variance and differing tax composition make shippers’ networks and total fuel spend susceptible to changes that have already started materializing.


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