CRS OUTLINES HISTORY OF FUEL TAXES.

                          Louis Alan Talley

Federal excise taxes have long been a part of our revenue history. In the field of gasoline taxation, the States led the way with Oregon enacting the first tax on motor fuels in 1919. By 1932, all States and the District of Columbia had followed suit with tax rates in the 2-7 cents per gallon range. The Federal Government first imposed the tax on gasoline in 1932 at a one cent per gallon rate because of a budgetary imbalance.

The tax is known as a "manufacturer's excise tax" because it is imposed at the level of production (i.e., the producer or importer) for more efficiency in collection. The tax is passed on through the retailer and is finally translated into a higher retail sales price, which is then paid by the consumer. Revenues collected go into the Highway Trust Fund.

The Federal Highway Trust Fund was established by the Highway Revenue Act of 1956 for the direct purpose of funding the construction of a 41,000 mile Interstate System, and aiding in the finance of primary, secondary and urban routes. This Act increased the tax on gasoline from two to three cents per gallon. Over the years, the Highway Trust Fund has been extended along with the Federal excise tax on gasoline. As expenditures have increased so has the tax rate on gasoline to its current level of 14.1 cents per gallon.

Expenditures have diverged three times from the original purpose of funding highway-related programs. First, in 1982, a Mass Transit Account was established within the Highway Trust Fund for capital and operating expenditures made under the Urban Mass Transportation Act of 1964. Revenues equivalent to 1.5 cents per gallon of the gasoline tax go into this Mass Transit Account. The second change provides a 0.1 cent per gallon tax imposed on gasoline to finance the Leaking Underground Storage Tank Trust Fund (LUST). Monies from this fund pay the cost of cleanup of underground storage tanks which leak petroleum products. Under the Revenue Reconciliation Act of 1990, the gasoline excise tax was increased by 5 cents with half the increase added the to [sic] Highway Trust Fund and the other half dedicated for Federal deficit reduction purposes. This new deficit reduction rate is scheduled to expire on and after October 1, 1995. Also, the LUST tax was reauthorized under the Revenue Reconciliation Act of 1990 through December 31, 1995.

TABLE OF CONTENTS

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- 1932

NATIONAL DEFENSE REQUIREMENTS

HIGHWAY TRUST FUND

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- 1990

TABLES

TABLE 1. Summary of Changes in the Rate of the Federal Manufacturers' Excise Tax on Gasoline

FEDERAL EXCISE TAXES ON GASOLINE AND THE HIGHWAY TRUST FUND

A SHORT HISTORY ¹

While excise taxes have long been a source of Federal tax revenue, the Federal manufacturers excise tax on gasoline was first made a part of the Federal tax structure by the Revenue Act of 1932, which became law on June 6, 1932. A manufacturer's excise tax is one which is collected at the level of production generally because of the ease of revenue collection.

Prior to this legislation, there had been a reluctance on the part of Federal officials and Congress to impose this tax at the Federal level. Instead, they preferred to relinquish this revenue source to the States to help them finance their requirements. Oregon was the first State to levy a gasoline tax in 1919. As of January 1932, all of the States and the District of Columbia had enacted legislation imposing a tax on gasoline with rates which ranged from two to seven cents per gallon.

However, during the severe depression of the 1930s, Federal revenues were sharply reduced and higher expenditures were necessitated for relief and public works programs. As a result, the Secretary of the Treasury, in his Annual Report for the fiscal year 1931, reported that the Federal Government had incurred a budgetary deficit of some $903 million that year. This marked the first year in more than a decade when Federal receipts failed to exceed Federal expenditures and produce a budgetary surplus. Moreover, the Secretary of the Treasury estimated at that time that even higher deficits were anticipated in the years immediately following: $2.1 billion in the fiscal [sic] 1932 and $1.4 billion in the fiscal year 1933.

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- 1932

In order to correct this budgetary imbalance, the Secretary of the Treasury submitted comprehensive tax-raising and expenditure- reduction proposals for congressional action. Among the tax recommendations were those for legislation increasing individual and corporation income, estate and gift, excise, and other taxes. Included in the excise tax proposals was the request for a new Federal manufacturers excise tax on gasoline, to be levied at the rate of one cent a gallon and terminate in 1934. It was estimated that adoption of such a tax would yield the U.S. Treasury approximately $165 million in revenues during the fiscal year 1933.

The House of Representatives, in its consideration of and action on these revenue-raising proposals, initially refused to approve a new Federal tax on gasoline. However, the Senate amended the House- passed bill, authorizing this tax at the rate of one cent per gallon, and the tax was retained in the final version of the bill approved by the House and Senate Conference Committee and signed into law.

As finally approved, Section 617(a) of the Revenue Act of 1932 ² imposed a Federal tax on gasoline sold by a producer or importer at the rate of one cent per gallon. Under Section 617(c) of this legislation, the term "producer" included a "refiner, compounder, or blender, and a dealer selling gasoline exclusively to producers of gasoline, as well as a producer." Gasoline was defined to include gasoline, benzol, and any other liquid which is used primarily as a fuel to propel motor vehicles, motor boats, or airplanes. Section 629 of this Act made this tax effective on June 21, 1932, for a temporary period, with provision for its termination on June 30, 1933. The Annual Report of the Commissioner of Internal Revenue for the fiscal year which ended on June 30, 1933, reported that $124.9 million was derived by the Federal Government from this source during the first year this legislation was in effect. This amount represented 7.7 percent of total Internal Revenue collection of $1,620 million derived from all sources during the fiscal year 1933.

Shortly before the tax was scheduled to expire, Congress enacted two bills into law which extended this tax for an additional year and increased its rate. Under Public Law 73 approved by the 73rd Congress ³ this tax was extended until June 30, 1934. The National Industrial Recovery Act, ⁴ signed into law on the same day, included provisions governing the rate of this tax. Section 211(a) of this Act authorized that the Federal gasoline tax be increased from one cent to one and one-half cents per gallon, effective June 17, 1933. Section 217(b) provided that this tax be reduced to one cent per gallon on the first day of the calendar year following the date proclaimed by the President when either of the following occurred first: 1) the close of the first fiscal year ending after 1933 when total Federal receipts exceeded total Federal expenditures, or 2) the 18th amendment to the Constitution, establishing national prohibition, was repealed (which would bring in additional revenues to the Federal treasury from liquor taxes).

Subsequently, President Franklin D. Roosevelt proclaimed repeal of the 18th amendment to the Constitution on December 5, 1933. Therefore, under authority of Section 217(b) of the National Industrial Recovery Act, the Federal gasoline tax reverted to its former rate of one cent per gallon on January 1, 1934.

Section 603 of the Revenue Act of 1934, ⁵ approved in the spring of 1934, continued this tax at the rate of one cent per gallon beyond its scheduled expiration date of June 30, 1934.

NATIONAL DEFENSE REQUIREMENTS

This rate was maintained until just before the United States entered World War II, when as a result of increased national defense requirements, Congress again took action increasing this tax. Section 210 of the Revenue Act of 1940 ⁶ authorized an increase to one and one-half cents per gallon for the five-year period beginning on July 1, 1940, and continuing through June 30, 1945, as part of a defense tax.

The following year, under Section 521(a)(20) of the Revenue Act of 1941, ⁷ this rate was made permanent by elimination of the June 30, 1945, expiration date which had been specified in the previous legislation.

This rate continued for more than a decade until the outbreak of the Korean War, when it was increased to two cents per gallon under authority of Section 489 of the Revenue Act of 1951. ⁸ This rate became effective on November 1, 1951, and it was authorized to continue until March 31, 1954. After this date, it was scheduled to be reduced to its former rate of one and one-half cents per gallon.

Before this reduction took place, Congress passed the Excise Tax Reduction Act of 1954, ⁹ and under Section 601(a)(6) of this legislation, this two-cents-per-gallon rate was extended for an additional year -- until March 31, 1955.

During the next two years Congress passed legislation granting one year extensions of this two-cents-per-gallon tax on gasoline by approval of the Tax Rate Extension Act of 1955 ¹⁰ [Section 3(a)(3)] and the Tax Rate Extension Act of 1956 ¹¹ [Section 3(a)(3)], which continued this rate to March 31, 1956, and March 31, 1957, respectively.

Public Law 466, enacted by the 84th Congress, ¹² provided that the Treasury Department refund those taxes paid on gasoline used on farms for farming purposes which had been purchased after December 31, 1955.

HIGHWAY TRUST FUND

The Federal-Aid Highway Act of 1956 ¹³ provided for a significant expansion in the Federal-aid highway program and authorized Federal funding over a longer period of time in order to permit long-range planning. In particular, it was considered necessary to authorize the entire Interstate Highway program in order to assure orderly planning and completion of this network of highways throughout the United States as efficiently and as economically as possible. For this reason, this Act authorized appropriations for the thirteen-year period from fiscal year 1957 through 1969 for this system.

In order to make the Federal-aid highway program self-financing, the Highway Revenue Act of 1956 ¹⁴ was incorporated as Title II of this legislation which imposed new taxes and increased others levied on highway users who are the direct beneficiaries of this program.

Section 205 of this Highway Revenue Act authorized an increase in the Federal gasoline tax from two to three cents per gallon for the sixteen-year period from July 1, 1956, through June 30, 1972. Thereafter, it was scheduled to be reduced to one and one-half cents per gallon.

Section 209 of this Act authorized the creation of the Highway Trust Fund to which there was to be appropriated from the General Fund of the Treasury certain percentages of receipts derived from highway-user taxes: gasoline, diesel and special motor fuel, tread rubber, tires and inner tubes, trucks, buses, etc. One hundred percent of the Federal gasoline tax receipts were to be transferred to this trust fund.

It was argued that transferring such taxes to the Highway Trust Fund were necessary to cover anticipated expenditures to be made under the Federal-aid highway program for the sixteen-year period from fiscal year 1957 through 1972. House Report 2022 (84th Congress), issued on this legislation, estimated that highway-user taxes would yield some $38.5 billion in revenues for this trust fund during this sixteen-year period -- enough to cover anticipated expenditures for the Federal-aid highway program of approximately $37.3 billion during this same period.

This legislation also made provision for refunding a certain portion of Federal gasoline taxes paid which were used for nonhighway purposes or by local transit systems.

Since enactment of this legislation, Congress has continued to pass laws extending the life of the Highway Trust Fund and extending and increasing the rates imposed on gasoline.

Under Section 201(a) of the Federal-Aid Highway Act of 1959, ¹⁵ the Federal gasoline tax was increased from three to four cents per gallon which was to be in effect from October 1, 1959, through June 30, 1961.

Under Section 201(b) of the Federal-Aid Highway Act of 1961, ¹⁶ this four-cent rate was extended beyond June 30, 1961, and the scheduled reduction to one and one-half cents per gallon, which the Highway Revenue Act of 1956 had authorized to take place on July 1, 1972, was deferred until October 1, 1972.

Following the 1961 Act, the next law affecting the Federal gasoline tax was the Federal-Aid Highway Act of 1970. ¹⁷ Under Section 303(a)(6) of this Act, the scheduled reduction in the rate of this tax to one and one-half cents per gallon was deferred from September 30, 1972, to September 30, 1977.

Again in 1976, an extension of excise tax rates without the scheduled rate reductions allocated to the Highway Trust Fund was provided in Title III of the Federal Aid Highway Act of 1976. ¹⁸ It was obvious that the Interstate Highway System was not going to be completed in 1977 (it was estimated in 1976 that it might be completed in 1988). Lack of time to study and report to Congress on modifications to the Highway Trust Fund led to the two-year extension. The Congress was concerned that without this legislation, funding would be interrupted. Thus, the Congress merely delayed decision-making until additional information could be gathered.

Two years later, it was announced that conclusions for modifications to the Trust Fund and its related taxes had not yet been reached. The Ways and Means Committee accepted the recommendation of the Public Works Committee and approved an extension of the Trust Fund and the taxes payable to the Fund. This five-year extension through September 30, 1984, became part of the Surface Transportation Assistance Act of 1978. ¹⁹

Two major studies were submitted to Congress in 1982. The first was a cost allocation study done by the Department of Transportation in May 1982. The second was a study of the excise tax structure which was provided to the Congress in December 1982 by the Department of the Treasury. More than a dozen hearings were held before the passage of the Surface Transportation Assistance Act of 1982. ²⁰ The bill is commonly referred to as the 4R Program: interstate reconstruction, resurfacing, restoration, and rehabilitation. The completion and selective expansion of the Interstate Highway System remain the primary goal. The gasoline excise tax was raised from its previous level of 4 cents per gallon to 9 cents per gallon. In conjunction with this increase, some highway user charges were eliminated and some were increased. The Act also provided that one cent of the 5- cent increase in the motor fuel taxes was to be allocated for mass transit purposes. A special Mass Transit Account was set up for expenditures made under the Urban Mass Transportation Act of 1964.

In response to concerns for the cost of cleanup of leaking underground storage tanks containing petroleum products, Congress established the Leaking Underground Storage Tank Trust Fund. ²¹ This fund receives revenues of 0.1 cent a gallon on the sale or use of gasoline (first effective January 1, 1987). The tax was scheduled to expire on the earlier of December 31, 1991, or the last day of the month in which the Secretary of the Treasury estimates that net revenues in the fund are at least $500 million. This additional tax terminated after August 31, 1990, because the Leaking Underground Storage Trust Fund had reached its net revenue target for termination. ²²

The Surface Transportation and Uniform Relocation Assistance Act of 1987 ²³ extended the highway-related excise taxes (including the tax on gasoline) through September 30, 1993.

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- 1990

Finally, the gasoline excise tax was changed under provisions of the Revenue Reconciliation Act of 1990. ²⁴ Under that Act, the tax rate was increased five cents per gallon, from nine to fourteen cents per gallon, with half the increased revenues going to the Highway Trust Fund with the remaining half of the increased revenues to be used for Federal deficit reduction purposes. The Leaking Underground Storage Tank Trust Fund (LUST) was reinstituted at the same 0.1 cent per gallon tax rate.

Thus, current law provides that the 14.1 cents imposed per gallon of gasoline is divided in three ways. The Highway Trust Fund receives 11.5 cents, 2.5 cents is dedicated for Federal deficit reduction purposes, and 0.1 cents goes into the LUST Trust Fund. The 14 cents rate is scheduled to expire on September 30, 1995, while the LUST tax provides that it will terminate on December 31, 1995.

From the Highway Trust Fund, 10 cents is to be expended on highway related programs with 1.5 cents placed into the Mass Transit Account. Amounts in the Mass Transit Account are used for capital and operational expenditures. Additionally, transfers from the Highway Trust Fund are made into the Land and Water Conservation Fund and the Boating Safety Account of the Aquatic Resources Trust Fund. Funds so transferred are equivalent to the gasoline taxes collected on fuel used in motorboats.

                                TABLE 1

² Revenue Act of 1932, Public Law 154, 72d Congress, approved June 6, 1932.

³ Act to Extend the Gasoline Tax for One Year, to Modify Postage Rates on Mail Matter and for other Purposes, Public Law 73, 73rd Congress, approved June 16, 1933.

⁴ National Industrial Recovery Act, Public Law 67, 73rd Congress, approved June 16, 1933.

⁵ Revenue Act of 1934, Public Law 216, 73rd Congress, approved May 10, 1934.

⁶ Revenue Act of 1940, Public Law 656, 76th Congress, approved June 25, 1940.

⁷ Revenue Act of 1941, Public Law 250, 77th Congress, approved September 20, 1941.

⁸ Revenue Act of 1951, Public Law 183, 82d Congress, approved October 20, 1951.

⁹ The Excise Tax Reduction Act of 1954, Public Law 324, 83rd Congress, approved March 31, 1954.

¹⁰ Tax Rate Extension Act of 1955, Public Law 18, 84th Congress, approved March 30, 1955.

¹¹ Tax Rate Extension Act of 1956, Public Law 458, 84th Congress, approved March 29, 1956.

¹² Act to Amend the Internal Revenue Code of 1954 to Relieve Farmers From Excise Taxes in the Case of Gasoline and Special Fuels Used on Farms for Farming Purposes, Public Law 266, 84th Congress, approved April 2, 1956.

¹³ Federal-Aid Highway and Highway Revenue Acts of 1956, Public Law 627, 84th Congress, approved June 29, 1956.

¹⁴ Ibid.

¹⁵ Federal-Aid Highway Act of 1959, Public Law 86-342, approved September 21, 1959.

¹⁶ Federal-Aid Highway Act of 1961, Public Law 87-61, approved June 29, 1961.

¹⁷ Federal-Aid Highway Act of 1970, Public Law 91-605, approved December 31, 1970.

¹⁸ Federal-Aid Highway Act of 1976, Public Law 94-280, approved May 5, 1976.

¹⁹ Surface Transportation Assistance Act of 1978, Public Law 95-599, approved November 6, 1978.

²⁰ Surface Transportation Assistance Act of 1982, Public Law 97-424, approved January 6, 1983.

²¹ Superfund Revenue Act of 1986, Public Law 99-499, approved October 17, 1986.

²² Internal Revenue Service Announcement 90-82, released June 27, 1990.

²³ Surface Transportation and Uniform Relocation Assistance Act of 1987, Public Law 100-17, approved April 2, 1987.

²⁴ Revenue Reconciliation Act of 1990, Public Law 101-508, approved November 5, 1990.