Gasoline taxes affect both the national economy and the decisions of individual consumers. If set at a sufficiently high level, they can reduce gasoline consumption to levels that some say reflect the adverse effects of gasoline use, including environmental damage and national security costs. However, these taxes can also slow the level of macroeconomic activity, although they might contribute to lowering the trade deficit by reducing the need for imported oil. If, as in the United States, federal gasoline tax revenues are directly tied to financing highway construction and maintenance, they can also create jobs and improve the national infrastructure. If the gasoline tax is designed in such a way that it contributes to stabilizing the price of gasoline, more informed decisions concerning the purchase of fuel-efficient vehicles and the funding of mass transit might also be made. It is widely believed that the federal gasoline tax is unpopular with consumers and that increasing the tax will likely generate opposition. The perceived unpopularity of the tax could make renewing it when the legislation expires at the end of fiscal 2011 controversial. However, the federal tax on gasoline is relatively low, only about 5% of the average price per gallon in August 2011, and less than 5% of the average price earlier in 2011, the most recent peak in gasoline prices. The tax raises revenue for highway construction and maintenance, which is directly related to automobile and gasoline use, suggesting that the tax can be viewed as a user charge. Many attempts to increase the tax since the early 1970s, especially those tied to energy policy initiatives, have been defeated; however, over that period the tax increased in several steps from 4 cents per gallon to the current rate of 18.4 cents per gallon. Although the federal gasoline tax is collected at the refinery, it is believed to be passed on to consumers, along with state and local taxes, and is included in the pump price. This report examines the effects of the federal excise tax on gasoline and analyzes the positive and negative effects of the tax. The report also evaluates the incentive structure that a higher gasoline tax would likely create, and examines a revised version of the tax, a variable gasoline tax. Excise taxes are, in effect, sales taxes levied on specific goods. The tax may be set either as a percent of the value of the good, an ad valorem tax, or as a set dollar value per unit of the good, a unit tax, as in the case of the federal gasoline tax. Excise taxes have been used to provide general, or dedicated, revenue and deficit reduction, but in some cases, for example, as in the taxes on liquor and cigarettes, there is some presumption that discouraging consumption, in addition to raising revenues, is a motivating factor in enacting the tax. The first excise tax on motor fuels in the United States was enacted by Oregon in 1919. Within 13 years, every state and the District of Columbia had enacted similar taxes ranging from 2 to 7 cents per gallon. The federal government levied its first excise tax on gasoline in 1932 at the rate of 1 cent per gallon as a general revenue tax. The federal excise tax became permanent in 1941 under Section 521 (a)(20) of the Revenue Act of 1941. Gasoline for use on highways is currently taxed by the federal government at 18.4 cents per gallon. Of this 18.4-cents-per-gallon tax, 18.3 cents per gallon is earmarked for the Highway Trust Fund, and 0.1 cents per gallon is allocated to the Leaking Underground Storage Tank (LUST) Trust Fund. The total excise taxes on gasoline, at the retail level, are in the range of approximately 40 cents to over 50 cents per gallon, depending on the specific state and local taxes that are added to the federal tax. Federal, as well as most state and local levies, are unit taxes, and as such, do not vary with the price of gasoline, as a tax based on ad valorem rates would. While opposition to the federal gasoline tax has existed since its inception, the direct tie to the Highway Trust Fund, the expansion of the interstate highway system, and highway projects to ease road congestion, have led to the view that the tax might be a proxy for a user charge, or price, to consumers who directly benefit from services provided through the tax, easing opposition to some extent. After the oil embargo of 1973-1974, interest in the use of the gasoline tax as a policy instrument expanded to areas beyond highway financing. The Nixon Administration considered using a gasoline tax increase as a way of reducing inflationary pressures in the economy. During the Ford Administration, Representative Al Ullman introduced legislation to increase gasoline taxes to fund alternative energy sources by allocating revenues to a proposed trust fund. The Carter Administration embraced the idea of escalating gasoline taxes as a part of an energy program in 1977 designed to reduce oil consumption and increase U.S. energy security. After the fall of the Shah of Iran in 1979 and the Iran-Iraq war that began in 1980, gasoline prices increased to then-record levels, and interest in gasoline taxes as a way to reduce foreign oil dependence was suggested by independent presidential candidate John Anderson. The Carter Administration proposed an oil import fee in March 1980 that was intended to approximate the effect of a gasoline tax. None of these proposals were successfully passed into law by Congress. In 1982, the Reagan Administration proposed an increase in the federal gasoline tax for the purpose of improving and repairing the nation's highways, based on the user-fee nature of the tax. Within the Administration, the fact that the tax was likely to create jobs was also considered as a reason for the tax increase, although President Reagan did not support government-funded jobs programs, or tax increases. The Reagan gasoline tax increase passed in both the House and the Senate and was signed into law on January 5, 1983. It raised the federal tax from 4 cents per gallon to 9 cents per gallon. A further increase in the gasoline tax was included in the Omnibus Budget Reconciliation Act of 1990, but the rationale for the tax increase was deficit reduction. President George H. W. Bush initially opposed the tax increase, but then reversed himself and supported it, and signed the Omnibus Budget Reconciliation Act of 1990 into law on November 5, 1990, raising the federal gasoline tax to 14.1 cents per gallon. President Bill Clinton initially supported a broad-based energy tax rather than a gasoline tax. The Administration decided to propose a tax on the energy content of fuels, a British Thermal Unit (B.T.U.) tax. This tax proposal failed to gain support in Congress, and, as an alternative, an increase in the gasoline tax to 18.4 cents per gallon was passed by Congress and signed by President Clinton, and took effect in December 1993. The revenue from the tax increase, 4.3 cents per gallon, was restricted to be allocated to deficit reduction. The latter part of the 1990s was characterized by declining federal deficits as tax revenues rose, as well as low gasoline prices, taking increases in the gasoline tax off the policy agenda. President George W. Bush's Administration did not propose any increase in the gasoline tax. However, there were calls for a temporary reduction in the tax to help American drivers who paid record high prices for gasoline in the summer of 2008. The Obama Administration has opposed an increase in the gasoline tax during the recession. However, it has advocated a number of policy objectives—greenhouse gas reduction, energy security, economic stimulus, more fuel efficiency, and moving toward alternative energy sources—that have been discussed in the past as justifications for gasoline tax increases. A number of tax provisions related to Highway Trust Fund financing are scheduled to expire on September 30, 2011. These include, along with Internal Revenue code section, all but 4.3 cents per gallon of the federal tax on highway gasoline, diesel fuel, kerosene, and some alternative fuels (§§4041(a) and 4081(d)(1)), the reduced rate of tax on partially exempt methanol, or ethanol, fuels (§4041(m)), the tax on the retail sale of heavy highway vehicles (§4051(c)), the tax on heavy truck tires (§4071(d)), and the annual use tax on heavy highway vehicles (§4481(f)). In addition, the LUST Trust Fund financing rates, Sections 4041(d)(4) and 4081(d)(3), are set to expire at the same time. The purpose of a tax is to fund government through a transfer of resources from the taxpayer to the government. As a result, every tax leaves the taxpayers with less purchasing power than they had before the tax was levied. However, the government may use the resources acquired through levying the tax to finance the provision of public goods and services for the benefit of the taxpayers. Because it is unlikely that every taxpayer can, or will, agree concerning the proper mix and level of every public good and service, as well as every choice and level of tax instrument, taxes are unlikely to be voluntary, and the government must use the force of law to levy and collect taxes. In addition, taxes can have a wide variety of economic effects, from altering consumer decisions concerning mix of goods to purchase, to national macroeconomic issues of economic growth, employment, and inflation. The legal, or statutory, incidence of an excise tax on gasoline is on the refiner; however, the tax is typically passed on to the consumer, and is paid at the pump along with state and local taxes, leaving the economic incidence of the tax with the consumer. This result is in accord with economic theory that suggests that if the demand for the product is totally or nearly totally inelastic, the firm will pass the tax on to consumers who will pay the tax, independent of the nature of supply. Although the demand for gasoline is not totally inelastic in the short run, its elasticity is very low, approximating total inelasticity.