2025 tax preference review: Natural Gas for Transportation
25-10 final report | December 2025
Aline Meysonnat, research analyst
Pete van Moorsel, tax review coordinator; Eric Thomas, legislative auditor
Legislative Auditor's conclusion
Three preferences reduce the cost of using natural gas as a transportation fuel. However, the emissions reduction objective for the preferences is not met.
Key points
- The Legislature passed four tax preferences to support the use of natural gas as a transportation fuel.
- The preferences aim to provide uniform tax treatment to sellers of natural gas, reduce emissions, promote economic development, and lower fuel costs.
- Two preferences meet legislative intent to provide uniform tax treatment for natural gas. A Department of Revenue work group will make recommendations about taxation of liquefied natural gas as a marine fuel by December 2025.
- The preferences met the economic development objective by lowering the cost to build a liquefied natural gas plant. The status of the employment objective is not disclosable.
- The emissions reduction objective of the tax preference is not met: Use of natural gas as a transportation fuel is less than originally anticipated. State ferries did not convert to liquefied natural gas, and on-road use of natural gas remains limited.
Legislative Auditor’s recommendations
If the legislative intent continues to be to support the use of natural gas as a transportation fuel, the Legislative Auditor makes three recommendations.
Recommendation #1
Continue the PUT and natural gas use tax exemptions to ensure uniform taxation of natural gas as a transportation fuel regardless of the seller.
When enacting the preferences, the Legislature stated that it is sound tax policy to give uniform tax treatment of natural gas as a transportation fuel regardless of the seller. Continuing these preferences aligns with legislative findings:
- The PUT exemption ensures that natural gas as a transportation fuel is taxed the same regardless of the seller.
- The natural gas use tax exemption ensures that consumers who purchase brokered natural gas are exempt from the same state and local taxes as those who purchase from in-state sellers.
Legislation required: No
Fiscal impact: If the Legislature continues the preference, beneficiaries will continue to save $1.2m-$5.3 million for the PUT exemption and $0.9 million for the natural gas use tax exemption in the 2027-29 biennium.
Implementation date: Not applicable
Commission recommendation: Endorse with comment (HTML)
Recommendation #2
Continue the sales tax exemption for liquefied natural gas in interstate commerce. In determining the level of benefit, the Legislature should consider recommendations from DOR's work group on taxation of marine use of liquefied natural gas.
The partial sales tax exemption does not provide uniform tax treatment for liquefied natural gas compared to other marine fuels, such as diesel. Diesel used in marine interstate commerce is fully exempt from sales tax, while the exemption for liquefied natural gas is limited to 90%. When the partial liquefied natural gas exemption expires in July 2028, its use will become subject to sales tax. The Legislature directed the Department of Revenue (DOR) to convene a work group and make a recommendation about taxation of liquefied natural gas as a marine fuel by December 1, 2025.
Legislation required: Yes
Fiscal impact: Depends on Legislature's policy choice.
Implementation date: 2028 legislative session.
Commission recommendation: Endorse with comment (HTML)
Recommendation #3
Modify the PUT exemption to require beneficiaries to report the amounts of compressed natural gas and liquefied natural gas produced and sold. This information would facilitate future reviews.
Beneficiaries of the machinery and equipment exemption are required to report sales of compressed natural gas and liquefied natural gas as a transportation fuel in years they claim that exemption. There is no reporting requirement of such sales for beneficiaries of the PUT exemption. Requiring beneficiaries of the PUT exemption to report the amount of compressed natural gas and liquefied natural gas sold for use as transportation fuel would facilitate future reviews of the tax preferences.
Legislation required: Yes
Fiscal impact: None
Implementation date: At the Legislature's discretion.
Commission recommendation: Endorse without comment (HTML)
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Natural Gas for Transportation (HTML)