Taxonomy and description

Terminology
Fuel taxes are levied on the purchase of fuel in most countries. Levying a tax on fuel consumption not only raises revenues (although this is generally not hypothecated), it is also a relatively unselective means of charging for road use. However, there is some differentiation by fuel type and mode. Fuels that are considered to be the most polluting are often taxed at a higher level. In the UK, four-star petrol is taxed at the highest rate, whilst unleaded and diesel are both cheaper. Fuel tax escalators have also been applied to raise fuel tax on an annual basis regardless of need to generate income. This differentiation and annual incrementation are both designed to influence purchasing decisions in favour of more environmentally friendly choices.

Some consumers are offered rebates or tax-free purchase, constituting a subsidy. In the UK, bus operators receive an 80% fuel tax rebate, train operators and airlines are not taxed on their fuel consumption and diesel purchased for agricultural uses is tax-free. Subsidies are usually provided to support socially necessary services or low profit industries. Some would argue that aviation fuel should be taxed. However, there are two counter arguments. Firstly, aviation fuel does not attract tax anywhere in the world, thus such a tax would need to be introduced and set on an international basis to maintain consistency. Secondly, if air travel were considered public transport, especially with regard to internal flights, then to levy fuel tax on airlines and not other forms of public transport would create an uneven playing field.

Fuel tax income is rarely hypothecated. Revenue for fuel tax and vehicle ownership taxation are both key income generators for many national governments.