President Donald Trump signed an executive order earlier this month intended to reduce diesel costs for drivers by allowing highway vehicles to use red-dyed diesel fuel. The order, announced during a campaign rally in Nebraska, permits the use of the fuel, which is usually restricted to off-road machinery like tractors, through the end of the year. Red-dyed diesel is physically identical to clear diesel but is typically 24.4 cents per gallon cheaper because it is exempt from federal highway taxes.
The Internal Revenue Service (IRS) stated on Wednesday that it will not inspect vehicles or impose penalties on individuals using dyed diesel on highways for the remainder of the year. The agency further noted that it \"anticipates that it will offer further guidance\" regarding the postponement of the tax and will \"explore avenues to eliminate\" the requirement for payment. However, the order has led to warnings from state officials and industry groups who caution that the move is a tax deferral rather than a permanent repeal, meaning drivers could be billed for the unpaid taxes later.
Molly Nixon, a senior fellow in executive power at the Cato Institute, stated that the president may lack the legal authority to unilaterally direct the IRS to stop assessing the tax, suggesting that a permanent tax removal would require congressional legislation. In South Dakota, Republican Governor Larry Rhoden has advised residents against using the dyed fuel for highway vehicles due to potential \"unintended consequences,\" though he directed state officials to stop checking gas tanks for the duration of the year. State Democrats have called for a special session to suspend the state's additional 28 cents per gallon diesel tax.
The scale of the impact involves fuel consumed by the trucking and agricultural sectors through December 31. The South Dakota Trucking Association has already issued a flyer to its members, recommending they maintain current fueling practices rather than switching to dyed diesel to avoid future tax liability. This creates a situation where the intended relief may not reach the target population if businesses determine the legal and financial uncertainty outweighs the immediate per-gallon savings. A driver in South Dakota noted that his company instructed him to continue using taxed diesel to avoid these potential retroactive charges.
The knock-on effects include a temporary suspension of federal and state enforcement of fuel-type regulations. While the IRS has signaled it will not penalize drivers for the remainder of the year, the long-term status of these taxes remains unresolved. Future policy will depend on whether the IRS can find a legal mechanism to eliminate the tax requirement or if the matter will require action from Congress. What happens next depends on the promised guidance from the IRS and the outcome of the December 31 deadline, when the current enforcement suspension is scheduled to expire.