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CRS REPORTS ON HISTORY OF FEDERAL GAS TAXES AND HIGHWAY TRUST FUND.

APR. 22, 1994

94-354 E

DATED APR. 22, 1994
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    gasoline tax
    Highway Trust Fund
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 94-4523
  • Tax Analysts Electronic Citation
    94 TNT 86-27
Citations: 94-354 E

SUMMARY

Excise taxes have long been a part of our country's 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 that ranged between two and seven cents per gallon. The Federal Government first imposed its excise tax on gasoline in 1932 at a one cent per gallon rate. The gas tax was a result of a Federal budgetary imbalance.

The gasoline 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 efficiency in collection. The tax is generally thought to be passed forward to the retailer translating into a higher retail gas sales price. Thus, the tax is ultimately paid by the consumer. Today, revenues collected from the Federal tax on gasoline help finance a number of different trust funds. However, the Highway Trust Fund still receives the largest amount of gas tax revenues by far. A portion of the revenues go into the General Fund of the Treasury for deficit reduction purposes. Smaller amounts go to other trust funds dependent on the ultimate use of the gasoline.

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. Each time the Highway Trust Fund has been extended so has the Federal excise tax on gasoline.

Expenditures have diverged three times from the original purpose of funding highway-related programs. First, in 1982, aMass Transit Account was established within the Highway Trust Fund for capital and operating expenditures made under the Urban Mass Transportation Act of 1964. Today, revenues equivalent to 2 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 help pay the cost of cleanup of underground storage tanks that leak petroleum products. After expiration of the LUST tax, it was reauthorized under a provision of the Revenue Reconciliation Act of 1990 through December 31, 1995. A third change, also a provision of this 1990 Act, dedicated a portion of the gasoline excise tax for deficit reduction purposes. Of today's 18.4 cents per gallon rate, 6.8 cents is deposited into the General Fund for deficit reduction purposes. This 6.8 cents deficit reduction rate decreases on October 1, 1995, to a permanent tax of 4.3 cents under provisions of the Omnibus Budget Reconciliation Act of 1993.

                          TABLE OF CONTENTS

 

 

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- 1932

 

NATIONAL DEFENSE REQUIREMENTS

 

HIGHWAY TRUST FUND

 

GASOLINE EXCISE TAX FOR DEFICIT REDUCTION -- NEW ERA

 

 

                               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, that became law on June 6, 1932. A manufacturer's excise tax is one that is collected at the level of production. A tax imposed at the production or importation level provides ease in administration and revenue collection.

Prior to the 1932 Act, 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 that 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 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 scheduled to 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 1933 fiscal year.

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 a gasoline tax at the rate of one cent per gallon. 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 that 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 that ended on June 30, 1933, reported that $124.9 million was derived by the Federal Government from the excise tax on gasoline. Thus, gasoline taxes represented 7.7 percent of the 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 that 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 alcohol 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

The one-cent 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 that had been specified in the Revenue Act of 1940.

The one and one-half cents per gallon 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, the 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 the 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)], that continued the rate first to March 31, 1956, and then to March 31, 1957.

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 that 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 to permit long-range planning. In particular, it was considered necessary to authorize the entire Interstate Highway program. This was done 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 that imposed new taxes and increased others levied on highway users who directly benefitted from 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 the Highway Trust Fund.

It was argued that transferring such taxes to the Highway Trust Fund was 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 that 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 that 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 remained 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 -- NEW ERA

Under provisions of the Omnibus Budget Revenue Reconciliation Act of 1990 (OBRA90) 24 the tax rate on highway and motorboat fuels was increased five cents per gallon. Thus, the tax increased from 9 to 14 cents per gallon of gasoline. Half of the increase in revenues from the gasoline tax imposed on highway use vehicles was dedicated as additional funding for the Highway Trust Fund with the remaining half deposited in the General Fund and dedicated for Federal deficit reduction. Of the 2.5-cent increase dedicated to the Highway Trust Fund, one-half cent was dedicated to the Mass Transit Account in that trust fund. Thus, the Mass Transit Account funding was raised from 1 cent to 1.5 cents. OBRA90 also reinstated the Leaking Underground Storage Tank Trust Fund (LUST). The LUST tax recommenced at the same 0.1 cent per gallon tax rate. 25 The 14-cent tax rate was scheduled to expire on September 30, 1995, while the LUST tax was scheduled to terminate three months later on December 31, 1995.

The conventional wisdom that had held since the establishment of the Highway Trust Fund, which was that the gasoline tax represented a user tax, was challenged. With the passage of OBRA90, the gasoline tax returned to the role it served prior to 1957 as a general fund revenue source, at least in part.

The following year the Congress passed the intermodal Surface Transportation Efficiency Act (ISTEA) of 1991. 26 The revenue title is called the Surface Transportation Revenue Act of 1991. This Act extends the highway-related excise taxes (including the tax on gasoline in section 8002(a)(3)) for four years. Hence, this law extends the tax on gasoline (without an increase in tax rate) through September 30, 1999. In addition, under provisions of the Act, States are permitted to spend their Highway Trust Fund grants on a broader range of alternative transportation modes and related infrastructure needs. This was done in response to the argument that highway users benefit from expenditures on mass transit and other transportation modes because the availability of these travel alternatives alleviates congestion on existing highways which may reduce the need to build additional roadways.

Also included in provisions of ISTEA was the establishment of a new trust fund known as the National Recreational Trails Trust Fund. This fund receives tax transfers from the Highway Trust Fund that represent tax receipts (imposed on gasoline, diesel, and special motor fuels) collected from NONHIGHWAY recreational fuel use. Examples of recreational fuels are those used in vehicles on recreational trails or back country terrain, and non-business fuel used in outdoor recreational equipment such as camp stoves.

Finally, the gasoline excise tax was changed under provisions of the Omnibus Budget Reconciliation Act of 1993 (OBRA93)(Section 13241(a). 27 Under provisions of OBRA93, the additional 2.5 cents gasoline tax dedicated for deficit reduction is to be transferred to the Highway Trust Fund beginning October 1, 1995. This additional 2.5-cent tax rate is extended from October 1, 1995, to September 30, 1999. The highway portion of the fund is to receive 2 cents, while the Mass Transit Account will be credited with 0.5 cent of the increased funding (for a total of 2 cent). In addition, OBRA93 provides for a permanent 4.3-cent per gallon tax on gasoline starting on October 1, 1993. Thus, the combination of the 2.5-cent OBRA90 gasoline tax rate and the permanent 4.3 cents OBRA93 gasoline tax rate results in a total of 6.8 cents per gallon dedicated to deficit reduction purposes between October 1, 1993, and October 1, 1995. Revenues collected from this 6.8-cent portion of the tax are placed in the General Fund of the United States Treasury.

        TABLE 1. Summary of Changes in the Rate of the Federal

 

                 Manufacturers' Excise Tax on Gasoline

 

 ____________________________________________________________________

 

 

 Rate of Tax in      Period to Which Applicable

 

 cents per gallon

 

 _____________________________________________________________________

 

 1                   June 21, 1932, to June 16, 1933

 

 1.5                 June 17, 1933, to December 31, 1933

 

 1                   January 1, 1934, to June 30, 1940

 

 1.5                 July 1, 1940, to October 31, 1951

 

 2                   November 1, 1951, to June 30, 1956

 

 3                   July 1, 1956, to September 30, 1959

 

 4                   October 1, 1959, to March 31, 1983

 

 9                   April 1, 1983, to December 1, 1986

 

 9.1                 January 1, 1987, to August 31, 1990 /a/

 

 9                   September 1, 1990, to November 30, 1990

 

 14.1                December 1, 1990 to September 30, 1993

 

 18.4                October 1, 1993 to December 31, 1995 /b/

 

 18.3                January 1, 1996 to September 30, 1999

 

 4.3                 October 1, 1999 and thereafter

 

 

                          FOOTNOTES TO TABLE

 

 

      /a/ This act provided that the 0.1 cent per gallon tax will

 

 terminate on the earlier of December 31, 1991, or when the Secretary

 

 of the Treasury determines that taxes equivalent to at least $500

 

 million in net revenues are in the Trust Fund. This additional tax

 

 terminated after August 31, 1990, because the LUST Trust Fund had

 

 reached its net revenue target for termination. (Internal Revenue

 

 Service Announcement 9082, released June 27, 1990.)

 

 

      /b/ Beginning on October 1, 1995, the revenues collected from

 

 the 2.5 cents "deficit reduction rate" are to be credited to the

 

 account of the Highway Trust Fund. Thus, while the gasoline excise

 

 tax rate holds constant at 18.4 cents, the distribution of amounts

 

 collected from the gasoline excise tax changes. The Highway Trust

 

 Fund will receive increased revenues as the rate credited to that

 

 fund increases from 11.5 to 14 cents. At this same time, the amount

 

 credited to the General Fund decreases from 6.8 to 4.3 cents.

 

 

                       END OF FOOTNOTES TO TABLE

 

FOOTNOTES

 

 

1 Much of this report has been taken from a Congressional Research Service Report prepared in the early 1970s by Maureen McBreen, an Economist in Taxation and Fiscal Policy of this Division.

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 86342, 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 94280, 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 97-24, 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 Omnibus Budget Reconciliation Act of 1990, Public Law 101- 508, approved November 5, 1990.

25 This act also instituted a new 2.5 cents per gallon tax on fuels used in rail transportation effective on December 1, 1990. Rail transportation generally uses diesel fuel. All revenues from this new tax go to general fund revenues with the tax scheduled to expire on October 1, 1995.

26 Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991, Public Law 102-240, approved December 18, 1991.

27 Omnibus Budget Reconciliation Act of 1993, Public Law 103- 66, approved August 10, 1993.

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Talley, Louis Alan
  • Institutional Authors
    Congressional Research Service
  • Code Sections
  • Index Terms
    gasoline tax
    Highway Trust Fund
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 94-4523
  • Tax Analysts Electronic Citation
    94 TNT 86-27
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