Oil markets extended their decline on Friday, with crude prices falling sharply after U.S. President Donald Trump said a peace agreement with Iran was close and canceled previously threatened military strikes. Brent crude slipped below $90 per barrel, trading around $88–$89, while WTI fell to roughly $85–$87, as traders priced in the possibility of de-escalation in the Middle East and a potential reopening of the Strait of Hormuz.
The decline allowed motorists to enjoy some reprieve at the pump, with national average gas prices falling to $4.15 per gallon from $4.52 a month ago.
The relief at the pump comes even as energy remains the biggest inflation concern for the broader economy. U.S. consumer prices rose 4.2% in May from a year earlier, the highest annual inflation rate in three years, with energy accounting for roughly 60% of the monthly increase in the Consumer Price Index.
While lower gasoline prices have provided some relief in recent weeks, higher crude prices driven by the Iran conflict continue to filter through fuel, transportation, and utility costs across the economy.
On Monday, GasBuddy’s head of petroleum analysis, Patrick De Haan, said lower oil costs and improving refinery runs were keeping downward pressure on gasoline prices, “however, the future of prices remains murky. With the Strait of Hormuz remaining effectively closed, global oil supplies continue to tighten, and any further deterioration in the situation could send prices sharply higher. For now, motorists may enjoy the savings at the pump, but the risk of a significant reversal has not gone away”.
Now, drivers across six U.S. states are getting ready for inflation-indexed fuel tax hikes that will coincide with the 2026 U.S. Semiquincentennial (America 250) on Independence Day:
#1. California
California continues to implement its annual July 1 inflation adjustment under SB 1, keeping it at the highest base excise tax rate in the country (exceeding 70 cents per gallon). Beginning July 1, California’s gasoline excise tax will increase from $0.612 to $0.634 per gallon while the diesel tax will rise to $0.48 per gallon.
When combining the state excise tax with the 18.4-cent federal excise tax, local sales taxes, and various environmental program surcharges, total fuel fees collected per gallon exceed 70 cents.
This maintains California’s status as having the highest state-based excise tax rate for gasoline in the country. Gas prices in California are currently averaging $5.83 per gallon, the highest in the U.S.
The California Department of Tax and Fee Administration (CDTFA) recalculates this rate every year based on the California Consumer Price Index.
Despite multiple legislative pushes by opponents to suspend the annual gas tax increases to relieve high consumer energy costs, the automatic inflation adjustments continue to be implemented as scheduled.
#2. Illinois
Illinois has suspended the scheduled 1.3-cent inflation-linked gas tax hike for six months, meaning the motor fuel tax rate will remain at its current 48.3 cents per gallon. However, drivers still face some of the highest fuel taxes in the country, often exceeding 85 cents per gallon when federal and local taxes are included. Gas prices in Illinois are currently averaging $4.48 per gallon.
The state suspended the automatic inflation adjustment that was set to increase the motor fuel tax from 48.3 cents to 49.6 cents per gallon. This automatic increase structure was originally established under the 2019 “Rebuild Illinois” infrastructure plan, which previously doubled the tax from 19 cents to 38 cents.
Depending on where you live, local taxes are also shifting. For example, in Kane County, the county motor fuel tax increased from 5 cents to 8 cents per gallon. Combining the state’s 48.3 cents per gallon motor fuel tax with the 6.25% state sales tax makes fuel in Illinois one of the most expensive in the U.S.
#3. New Jersey
New Jersey routinely adjusts its rates to maintain a stable revenue stream for its Transportation Trust Fund, resulting in some of the highest combined state and federal pump taxes in the nation at roughly 63.3 cents total.
The state levies Motor Fuels Tax at a fixed rate of $0.105 per gallon on gasoline and $0.135 per gallon on diesel as well as a variable rate Petroleum Products Gross Receipts Tax (PPGRT) that is reviewed and adjusted annually by the State Treasurer and legislative officials to meet statutory revenue targets for the Transportation Trust Fund (TTF).
The state periodically adjusts this tax because, by law, the TTF requires a steady, guaranteed revenue stream targeting over $2.1 billion annually to fund road, bridge and rail infrastructure. When fuel consumption drops, the PPGRT rate automatically increases to compensate for the lost volume.
Gas prices in New Jersey currently average $4.20 per gallon.
#4. Michigan
Back in January, Michigan completely restructured its fuel tax system to fund long-term infrastructure improvements. Lawmakers eliminated the state’s 6% sales tax on gasoline and replaced it with a flat motor fuel excise tax of 52.4 cents per gallon. However, the change is considered largely “revenue neutral,” meaning drivers will likely only see a minor net increase (around 1 to 2 cents per gallon) at the pump.
By eliminating the 6% sales tax on gasoline, all tax revenue collected at the pump is now legally directed to the State of Michigan Fuel Tax Changes and dedicated exclusively to road and bridge construction. Prior to the reform, motorists paid a base of 31 cents per gallon plus the variable 6% sales tax. Now, the flat 52.4-cent rate replaces it, keeping pump prices stable regardless of market fluctuations in fuel prices.
Motorists in Michigan are currently paying $4.28 per gallon.
#5. Maryland
Maryland uses an automatic mechanism to index its gas tax to inflation, governed by a 2013 state law. This formula triggers yearly adjustments tied to the Consumer Price Index (CPI) to help fund the state’s multimodal Transportation Trust Fund (TTF), which supports both highway projects and regional public transit.
Starting July 1, Maryland’s motor fuel tax will increase to 46.6 cents per gallon for regular gasoline, marking an increase of six-tenths of a cent driven by a 2.8% annual inflation increase.A portion of the gas tax is indexed to inflation. This inflation-linked component is capped at a maximum increase of 8% in any single year. The formula also applies a sales-and-use tax equivalent on the wholesale price of fuel, meaning that part of the tax rate naturally fluctuates with wholesale gas prices.
Revenues generated from the gas tax, the 6.5% vehicle excise tax and vehicle registration fees are pooled into the TTF. These revenues are blended together and distributed to various transportation modes, providing the Maryland Department of Transportation the flexibility to allocate resources between the Maryland Transit Administration (MTA) and state highway networks.
Regular gasoline in Maryland is currently averaging $3.93 per gallon.
#6. Mississippi
Mississippi has enacted a multi-year tax overhaul that raises the state’s fuel tax by a total of 9 cents per gallon. The gas and diesel excise tax is scheduled to increase in 3-cent increments each July until it reaches a total rate of 27.4 cents per gallon.
The fuel tax adjustments change Mississippi’s long-standing flat rate of 18 cents per gallon–which had remained untouched since 1987–up to 27 cents per gallon by 2027. Starting July 1, 2029, the rate will transition to an inflation-adjusted metric that will update every other year based on the National Highway Construction Cost Index, capped at a maximum increase of 1 cent per period.
The overhaul is projected to generate roughly $200 million to $212 million annually in new infrastructure revenue. The additional revenue generated by this increase is dedicated entirely to improving state infrastructure, with funds split between the Mississippi Department of Transportation and the state aid road system.
Thankfully, motorists in Mississippi are currently enjoying some of the cheapest gas in the country with a gallon of regular gasoline currently averaging $3.72.
Federal Relief, State Tax Hikes
State fuel tax increases are also likely to intensify debate over a federal gas tax holiday.
President Trump recently endorsed the idea, while several lawmakers have introduced legislation that would temporarily suspend the federal gasoline tax of 18.4 cents per gallon and the 24.4-cent diesel tax in an effort to offset higher fuel costs tied to the Middle East conflict.
Supporters argue that motorists deserve relief after gasoline prices surged following the disruption of shipping through the Strait of Hormuz. However, critics note that the federal tax represents only a small fraction of the price consumers pay at the pump. According to an analysis by the Tax Foundation, suspending the federal gas tax would save most drivers roughly $6 to $11 per month, offsetting only a portion of the increase motorists have experienced since oil prices began climbing earlier this year, according to Business Insider.
The fiscal costs could be far larger. The Tax Foundation estimates that a three-month federal gas tax holiday beginning in July would reduce Highway Trust Fund revenues by roughly $9 billion, with a net budgetary cost of $6.6 billion after accounting for federal tax offsets. A six-month suspension would carry an estimated cost of nearly $13 billion.
The debate comes as energy accounted for roughly 60% of May’s monthly increase in consumer prices and several states continue moving forward with fuel tax increases or inflation-linked adjustments of their own. For motorists, the result is a growing disconnect between calls for tax relief in Washington and rising transportation taxes elsewhere in the country.
By Alex Kimani for Oilprice.com
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