Gas Guzzler Tax

What Is the Gas Guzzler Tax?

The gas guzzler tax is a surcharge added to the sales or lease price of cars in the U.S. that have poor fuel economy ratings. The tax, which is paid by the manufacturer or importer of the vehicle, varies depending on the miles-per-gallon efficiency of the vehicle and ranges from $1,000 to $7,700.

The gas guzzler tax is imposed on passenger cars but not on trucks, sports utility vehicles, or minivans. This is because the law was passed in 1978 when such models were rarely used as passenger vehicles.

Congress established the gas guzzler tax provision in the Energy Tax Act of 1978 to discourage the production and purchase of fuel-inefficient vehicles.

How Does the Gas Guzzler Tax Work?

In order to escape the gas guzzler tax, a car must get at least 22.5 miles per gallon (mpg) in combined city and highway driving.

The amount of the tax due is based on just how much gas the car guzzles. That is, the worse the fuel economy, the higher the tax. Cars that fall just below 22.5 mpg are taxed $1,000, while cars that get less than 12.5 mpg are taxed at $7,000, the top of the range. The tax is reported on Internal Revenue Service (IRS) Form 6197. It is reported after the end of the production year when the total number of vehicles produced is known.

Shoppers for a new car will see the amount of the tax posted on the window sticker of the car if it is subject to the gas guzzler tax.

Which Cars Are Subject to Gas Guzzler Tax?

The EPA published a list of new car models that were subject to the gas guzzler tax up until 2016. It has not published one since, but the 2016 list of gas guzzlers gives a sense of the kind of cars that are subject to the tax.

The majority are high-end luxury and sports cars, including models from Aston Martin, BMW, Ferrari, and Rolls-Royce. A few American muscle cars were on the list, too, including the Chevrolet Corvette and one iteration of the Ford Mustang.

How Fuel Efficiency Is Tested

Anyone interested in the fuel economy of any vehicle sold in the U.S. can check the Fuel Economy Guide that has been published by the U.S. government for every model year since 1984.

Manufacturers are required to use the same test as the EPA when they measure vehicle fuel economy for the gas guzzler tax and new car fuel economy labels. However, the calculation procedures are different. According to the EPA, an adjustment factor is applied to the fuel economy test results for the purposes of the label, but not for the tax.

The adjustment is meant to reflect the differences between real-world driving and laboratory testing conditions. This difference is referred to as in-use shortfall. To calculate the shortfall, mpg values listed in the Fuel Economy Guide and shown on fuel economy labels are based on three tests in addition to the standard fuel-economy test.

The combined city and highway fuel economy that is used to determine tax liability is not adjusted to account for in-use shortfall, so it is higher than the mpg values provided in the Fuel Economy Guide and posted on the window stickers of new vehicles.

Problems With the Gas Guzzler Tax

When the gas guzzler tax was imposed in 1978, prices at the pump had increased 75% from six years earlier. Meanwhile, U.S. oil production peaked in 1970 and was falling steadily through the decade as demand increased.

The OPEC oil embargo of 1973 added additional pain for consumers in the U.S. and abroad. The decade is famous for its gas shortages and skyrocketing prices.

This is the environment in which the gas guzzler tax was passed. Its purpose was to incentivize more fuel-conscious spending on the part of consumers and fuel efficiency on the part of manufacturers.

Vehicles that are Exempt from the Gas-Guzzler Tax

In 1984, Jeep introduced the Cherokee XJ, which is widely credited as the first sport utility vehicle (SUV). The SUV didn't exist when the gas guzzler tax was passed, but over the next 30 years, it became the most popular type of vehicle sold in the U.S.

In 2019, American consumers continued to favor trucks and SUVs over cars. Nonseasonally adjusted passenger car sales in the U.S. for 2019 declined 10.9% to 4.7 million units, versus 5.3 million units in 2018. Sales of trucks, minivans and SUVs for the year totaled 12.2 million units, up 2.8% from the 2018 figure of 11.9 million units, according to an S&P Global Market Intelligence analysis.

Auto manufacturers were keen to take advantage of a loophole in the gas guzzler tax and its interpretation through regulatory agencies like the EPA that exempted "light-duty trucks" from the law. Consequently, the amount of gas guzzler tax collected by the U.S. in the fiscal year 2019 was under $43 million.