Blog: How high is the outrageously over-the-top yearly gas tax hike really?

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Does a yearly inflation adjustment of an excise tax qualify as a ‘tax hike’ or is that just clickbait?

The media loves clickbait, so whenever they can use words like “Gas Tax” or “Tax Hike”, they will blow it up as big as possible.

“A hike is a sudden or large increase in prices, rates, taxes, or quantities.” [Collins Dictionary]

Since 2017 (SB-1) California is adjusting the California excise tax for gasoline for inflation. Should a yearly inflation adjustment even be called a hike, or is that shady journalism?

The Myth around the Excessive California Gas Taxes and Fees

As the stories go, California is this very small island with very few cars needing a very special, very rare, very chic, very “green”, and very boutique blend of gasoline which costs poor Californians an arm and a leg. Then there is the fact that California has the highest gas taxes in all of the land. And apparently, after all that, California still imposes a wide range of fees and taxes on top of that. Even worse, the stories continue: our roads are in such bad condition because Sacramento moves infrastructure money from the gas tax into the general fund.

Boutique Blend = CARBOB = California Reformulated Gasoline Blendstock for Oxygenate Blending

A little investigation and critical thinking reveal that these stories are likely overblown and possibly inaccurate. But we still haven’t found the real story here either.

CA refinery in Rodeo [source: Getty Images]

Let’s do the Numbers

If our little exercise in critical thinking hasn’t helped, maybe it’s time to look at real numbers.

So, how small is the amount of Boutique Blend (CARBOB) that is cooked to a very specific standard, only to be used by our small Island called California?

Fuel consumption in barrels per day (bpd)

USA: 8,810,000 bpd
China: 3,103,000 bpd
Brazil: 1,005,000 bpd
Russia: 847,000 bpd
India: 796,000 bpd

It turns out, if California were a country, it would rank 4th or 5th largest in the world for gasoline consumption, just around the values of Russia, India or Texas (920,000 bpd). California is using 880,000 barrels per day, 321 million barrels per year, or 13.5 billion gallons per year. That doesn’t sound so small, does it?

Cost of CARBOB

The huge amount of gasoline consumed in California has also given refiners a strong incentive to improve the process of creating CA’s special blend. They also had plenty of time to reduce costs.

“California’s unique, cleaner-burning gasoline blend specification costs more to produce than other types of gasoline, typically amounting to a 10-to-15 cents per gallon price difference between California and the U.S. average.” [California Energy Commission]

While the industry and its lobbyists seem to focus on an extra cost of ca. $0.10 – $0.15 per gallon, comparable data and estimates done by universities and chemists come closer to $0.05 – $0.10 per gallon. Either way, at such a low cost, we can just agree on $0.10.

Yes, the ginormously high extra cost of creating California’s CARBOB blend is basically a measly $0.10 per gallon or less than half a cent per mile driven.

Which brings us to the gasoline excise tax on manufacturers, retailers, and importers.

What exactly is an Excise Tax?

Let’s address the elephant in the room first. Excise taxes are meant to discourage the manufacturing, sales, and consumption of certain products that are deemed bad for people; they are a social policy. We are talking products like tobacco, alcohol, sugar, cannabis, gambling, guns, tanning beds, coal, and fossil fuels. Most of these products are known to lead to either substance abuse or behavioral addiction. The way certain people are in love with fossil fuels – it could be both.

“Excise taxes are designed to discourage the use of products linked to health risks by making them more expensive and less attractive to consumers. The generated revenue should then be seen as an investment to improve society.” [Zarathustra]

Now, since the excise tax doesn’t seem to have discouraged driving too much, the tax might actually be misunderstood or just too low.
So how low is it really?

Federal Excise Tax and Fees:
Excise: $0.1830
Fees: $0.0010 (LUST)
Total: $0.1840 for gasoline ($0.244 for diesel)
Remarks: Adjusted for inflation $1 in 1993 would have the value of $2.24 in 2025.

Which means the Federal Excise Tax should be over 41 cents today. The feds are essentially providing a massive governmental subsidy on gasoline of over 23 cents per gallon.

The fact that the price of infrastructure costs has gone up 500-800% for highway miles since the 1990s means this governmental program is even bigger than people think.

State Excise Taxes and Fees (average):
Excise: $0.2823
Fees: $0.0549
Total: $0.3307
Sales Tax: N.A.
Remarks: The federal government hasn’t adjusted its gasoline excise taxes for years

California State Excise Taxes and Fees:
Excise: $0.6120
Fees: $0.0972
Total: $0.7092 (or $0.8732 for diesel fuel)
Sales Tax: no real consumer sales tax
Remarks: Just like with the current tariff discussion, not one of these California excise taxes is actually levied onto the consumer; they are levied on the producers, retailers and importers of these products. The same is true for the 2.25% “sales tax” on gasoline.

And just like with tariffs, the producers, retailers, and importers could eat the additional cost. But just like with tariffs, we can safely assume that the producers, retailers, and importers will be passing the cost through to the consumer at the time of sale.

We buy in gallons, we spend in Vehicle Miles Traveled (VMT)

Sacramento lawmakers have established that “congestion” cannot be fixed by adding lanes. Caltrans and other transportation agencies are not allowed to make the case for “Level-Of-Service” (LOS) or “congestion” anymore. Automobile delay and road congestion are no longer considered significant environmental impacts for most projects. Therefore since SB 743 (2014) these terms shouldn’t be used in Environmental Impact Reports (EIR) anymore. To get an EIR approved, the project team must prove that the project reduces VMT. The transportation currency of the state is now Vehicle Miles Traveled (VMT).

California Excise Tax, Fees, CARBOB at 25 mpg (rounded)
Total: $0.8092 (CA excise tax, fees, cost of CARBOB)
Excise: $0.02 per mile
Fees: $0.00 per mile
CARBOB: $0.00 per mile
Total: $0.03 per mile
Remarks: If you take an average economy car (25mpg), the average driver would spend ca. 3 cents per mile on these excise taxes and fees.
And 2-4 cents per mile is indeed also what California’s Road Charge pilot is suggesting.

America doesn’t do Cost-Benefit Analysis anymore

In 1993, the Natural Resources Defense Council concluded that various modes of transportation come with various costs per passenger mile:

auto: $0.33-$0.53
bus: $0.35-$0.40
rail: $0.48-$0.52

The defense council omitted a crucial aspect of ‘Benefit’, but the ‘Cost’ part is illuminating enough.

The 3 cents California excise tax, fees, and regulations add onto the price per passenger mile are still dwarfing the 33-53 cents society is paying to subsidize driving. And we are comparing 2025 CA data with a 1993 research paper. Newer research has those numbers at $1-$2, depending on externalities.

Conclusion

AAA says that, on average America, driving an average car for an average amount of miles costs the average owner an average amount of $0.72. California isn’t exactly average. With more affluent individuals, larger vehicles, inflated purchase prices, higher insurance costs, and increased local fuel prices, the AAA average quickly balloons toward $1.50. The value for a larger truck might soon exceed $4, just depreciation and insurance alone.

The $0.03 for the California blend, excise taxes, and environmental fees, compared to AAA’s higher California average of $1.50, doesn’t sound like a significantly over-the-top gas tax hike anymore.

To our esteemed members of the outrage press: a yearly inflation adjustment of a rounded $0.00 per mile driven does not exactly qualify as a “tax hike”.

It’s also an “excise hike”, which is good social policy as the nation actually wants to discourage more driving.

They are designed to discourage driving and incentivize activity, with the added benefit of reducing congestion and lowering infrastructure costs. Environmental schemes and fees (like cap and trade) are supposed to reduce GHG emissions and save the planet. And if our boutique blend of California gasoline (CARBOB) really is so much cleaner, it feels almost unpatriotic for a real Californian to complain about reducing congestion, breathing cleaner air and saving the planet.

BUT ….

Only three questions are left to be asked by our most critical thinkers:

Is CARBOB really this “clean gasoline” that made driving in California so much greener?
Have these environmental schemes and fees really reduced the amount of GHG emissions over the years?
Have only 3 cents of excise taxes and fees really done much in discouraging driving and reducing congestion?

If the excise tax was used correctly, why wouldn’t all of it end up in the general fund to counter all the negative outcomes of driving and car-centric living? Why is it used to build more car infrastructure to incentivize more driving? In other words, using gasoline excise taxes for building more car infrastructure would be equivalent to using tobacco taxes to grow and manufacture more addictive cigarettes.
How counterproductive would that be?

“Taxes on Tobacco Help Reduce the Number of Tobacco Users” [CDC]

Ouch. With just a few questions, we might have just opened another Pandora’s Box.

Post.Scriptum.

Oh, and before I forget, the high California gas prices are actually coming from price gouging by the major refiners and the higher real estate and labor costs of running gas stations in an urban area like ours. But mostly it’s hidden in those ‘margins‘ or what the common man would call “price gouging“.

… to be continued.