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Illinois Gasoline Tax Increase – 47 cents per gallon after July 1

Starting July 1, Illinois residents will see a slight increase in gasoline prices as the state implements a new fuel tax of 47 cents per gallon – a 3.5% increase over the current tax rate of 45.4 cents per gallon. That represents a 147% increase over the past seven years.

Fuel tax in Illinois

Established in 1977, Illinois’ fuel tax is levied on the distribution and delivery of fuel. The tax is periodically adjusted to reflect the state’s evolving infrastructure needs and inflationary pressures.

The latest increase is part of a larger program by Governor JB Pritzker, the Rebuild Illinois Capital Plan. The program calls for investments of $44.8 billion over six years to be spent on roads and bridges, railroad crossings, aviation facilities and port improvements.

Illinois already has the second-highest gasoline tax in the state after California. With the July 1 increase, Illinois is now only four cents below California’s lead rate of 51 cents per gallon.

General reasons for the gas tax

A primary reason most states raise gasoline taxes is to provide funds for infrastructure development and maintenance. Roads, highways, bridges, and public transportation require investment to ensure safety—and targeted gasoline tax funds allow states to address wear and tear on infrastructure caused by vehicles. The gasoline tax is thus a somewhat watered-down tax on infrastructure use.

Gasoline taxes are often indexed to inflation, as is the case in Illinois, through the Consumer Price Index. Indexing ensures that tax revenues keep pace with rising maintenance costs—as the cost of building materials, labor, and other things rise, there must be a corresponding increase in revenues to meet those needs.

In recent years, rising gasoline taxes have also served as a policy tool to encourage greener transportation costs. Higher fuel prices can prompt consumers to consider modes of transportation they might not otherwise have chosen—from public transit to more fuel-efficient or electric vehicles.

Investing in infrastructure through gasoline tax revenues can also have a positive impact on job creation. In this sense, it can be thought of as a tax on the oil and gas industry, as part of its profits are used for construction projects – from maintenance to new construction. Infrastructure projects can create significant job opportunities that have an economic multiplier effect – they improve infrastructure and employ taxpayers, which in turn leads to increased tax revenues.

Internalization of costs

One reason for many government gasoline tax increases is to internalize costs that would otherwise be passed on to society. In other words, when a barrel of oil is refined, sold as gasoline, and burned in a vehicle, there are costs that are not accounted for in every transaction in the production chain. The most obvious is that the cost of environmental damage is not accounted for or paid for.

The cost of CO2 emissions from a barrel of oil is $77.70, and each barrel of oil is equivalent to about 19 gallons of gasoline, so the cost of CO2 is about $4 per gallon of gasoline.

This means that for every gallon of gasoline burned, society is charged about $4 in costs to remove CO2 emissions and the harmful effects of atmospheric carbon. Simply put, the oil and gas industry is subsidized by taxpayers to the tune of about $48 per tank of gas for a small car or $60 for a larger car.

In summary, increasing gasoline taxes is a multi-faceted policy tool designed to provide funds for infrastructure development, support environmental goals, and internalize the externalities caused by the oil and gas industry.

Although costs continue to rise, they remain far below the actual costs to society.

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