WHAT IS 'Gas Guzzler Tax'

Gas guzzler tax is added on sales of vehicles that have poor fuel economy. Congress established Gas Guzzler Tax provisions in the Energy Tax Act of 1978 to discourage the production and purchase of fuel-inefficient vehicles.

BREAKING DOWN 'Gas Guzzler Tax'

The Gas Guzzler Tax is assessed on new cars that do not meet 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 a certain number of miles per gallon. The IRS is responsible for administering the Gas Guzzler Program and collecting the taxes from car manufacturers or importers. 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, or EPA, procedures to calculate the tax. The calculation weights 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. 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. 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 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, 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. The tests measure fuel economy 1) at cold ambient temperatures, 2) at warmer temperatures with the air conditioner running, and 3) 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.

  1. Alternative Fuels Tax Credit

    The alternative fuels credit, as outlined by the Internal Revenue ...
  2. Cash for Clunkers

    Cash for Clunkers was a former federal program that gave owners ...
  3. Tax Expense

    A tax expense is a liability owed to federal, state/provincial ...
  4. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  5. Car Allowance Rebate System - CARS

    The Car Allowance Rebate System was a U.S. government program ...
  6. Net of Tax

    Net of tax is an accounting figure that has been adjusted for ...
Related Articles
  1. Investing

    Can Electric Cars Replace Gas Guzzlers?

    High costs and poor battery performance have deterred many from switching to electric cars, which begs the question: can electric cars replace gas guzzlers?
  2. Investing

    Getting A Grip On The Cost Of Gas

    Feeling overwhelmed by rising oil prices? We offer some tips that will save you money.
  3. Taxes

    5 Reasons To Buy A New Car

    Even the most frugal drivers have a tipping point. Is it time for a new car?
  4. Investing

    Playing The Growth In Natural Gas Powered Vehicles

    Natural gas vehicles are taking off in a big way. Fleet sales and heavy duty truck demand is growing and analysts predict big things in the future. For investors, betting on the trend could mean ...
  5. Personal Finance

    The Complete Guide to Buying a New Car

    Here's everything you need to know about buying a new car.
  6. Investing

    How Gas Prices Affect The Economy

    Although economists may argue about whether gas prices have an effect on the economy, there is a connection between consumer confidence, spending habits and gas prices.
  7. Investing

    Plug Power in China Deal for Fuel Cell Vehicle (PLUG)

    The hydrogen and fuel cell leader teams with two Chinese partners with a goal to deliver industrial truck prototypes and 13,500 commercial units by 2021.
  8. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  9. Taxes

    5 States Without Sales Tax

    Learn about the five states that do not charge sales taxes and about other taxes the states levy instead in order to generate revenue.
  1. What are the differences between regressive, proportional, and progressive taxes?

    Learn the three basic types of tax systems--regressive, proportional, and progressive--used in the U.S., and how they affect ... Read Answer >>
  2. How much impact does government regulation have on the automotive sector?

    Learn about how government regulation affects the automotive industry in terms of design, safety features, fuel-economy and ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center