What Is a Gas Guzzler Tax?

A gas guzzler tax is a tax added on sales of vehicles that have poor fuel economy. The tax amount varies depending on the miles-per-gallon efficiency of the vehicle and ranges from $1,000–$7,700.

Congress established Gas Guzzler Tax provisions in the Energy Tax Act of 1978 to discourage the production and purchase of fuel-inefficient vehicles.

Key Takeaways

  • A gas guzzler tax is a tax added onto cars with low fuel efficiency.
  • It is levied and collected by the Internal Revenue Service.
  • Congress established Gas Guzzler Tax provisions in the Energy Tax Act of 1978 to discourage the production and purchase of fuel-inefficient vehicles.

How Does the Gas Guzzler Tax Work

The Gas Guzzler Tax is assessed on new cars that do not meet the required fuel economy levels. These taxes apply only to passenger cars. Trucks, minivans, and sport utility vehicles are not covered because these vehicle types were not widely available in 1978 and were rarely used for non-commercial purposes.

A vehicle is subject to a tax if it gets less than 22.5 miles per gallon (mpg) and (most importantly) it is not considered to be a truck or SUV. The IRS is responsible for administering the Gas Guzzler Program and collecting the taxes from car manufacturers or importers. IRS form 6197 is used to report gas mileage and calculate the tax.

The amount of tax is posted on the window stickers of new cars. The lower the fuel economy, the higher the tax.

Calculating the Gas Guzzler Tax

The Gas Guzzler Tax for each vehicle is based on its combined city and highway fuel economy value.

Manufacturers must follow U.S. Environmental Protection Agency (EPA) procedures to calculate the tax. The calculation weighs fuel economy test results for city and highway driving cycles. The combined value is based on 55 percent city driving and 45 percent highway driving.

Fuel economy values are calculated before sales begin for the model year; however, the EPA has not published a schedule for gas guzzlers subject to the tax since 2016. For that year, the majority of cars subject to the tax were luxury sedans, high-end sports cars and muscle cars.

The total amount of the tax is determined later and is based on the total number of gas-guzzler vehicles that were sold that year. It is assessed after production has ended for the model year and is paid by the vehicle manufacturer or importer.

The EPA and manufacturers use the same test to measure vehicle fuel economy for the Gas Guzzler Tax and for new car fuel economy labels. However, the calculation procedures for tax and label purposes differ, resulting in different fuel economy values. This is because 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 intended to help account for the differences between real-world and laboratory testing conditions. This difference is referred to as in-use shortfall. To account for it, miles-per-gallon (mpg) values listed in the Fuel Economy Guide and shown on fuel economy labels are based on fuel economy test results of the city and highway tests plus three additional tests.

Tests for fuel economy are measured at cold ambient temperatures, at warmer temperatures with the air conditioner running, and when operated at high speeds and high acceleration rates. However, 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 first implemented in 1978, nominal gas prices had increased 75% from six years earlier, and U.S. oil production, which peaked in 1970, was falling steadily through the decade as demand increased.  The OPEC oil embargo of 1973 added additional pain to the markets where U.S. consumers bought fuel for their cars, and the decade is famous for its gas shortages and skyrocketing prices.

This is the environment in which the gas guzzler tax came to be; its purpose was to incentivize more fuel-conscious spending on the part of consumers and fuel efficiency on the part of manufacturers. As a punitive tax, it was unpopular among people who believed the markets should be setting prices, and it was vigorously opposed by both the fossil fuel industry and the automobile industry.

In 1984 Jeep introduced the Cherokee XJ, which is widely credited as the first sport utility vehicle (SUV). This class of vehicle, which didn't exist when the gas guzzler tax was passed, became over the next thirty years the most popular type of vehicle sold in the U.S. SUV sales surpassed the sale of passenger sedans in the 2010s. In 2016, sales of SUVs and light-duty trucks surpassed traditional car sales for the year by over 3 million units, and by 2018, car sales were less than a third of the U.S. market. 

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 to increase profits on the back of this consumer trend. Consequently, the amount of gas guzzler tax collected by the U.S. in FY 2018 was just under $42 million.