The Cost of Driving Green in Israel Is About to Rise

Come August, low-emission cars will lose big tax breaks as Israel scrambles to drum up revenues.

Sales tax on 70% of all car models sold in Israel will rise by as much NIS 12,000 or more on August 1, when a new method for calculating their environmental friendliness takes effect.

The increases won’t necessarily be passed on fully to the consumer, but it will be up to importers to decide how much to absorb.

The “green” tax, as it is called, was introduced in 2009 and is actually a system for reducing the basic sales tax according to a model’s emissions ratings. That year the basic sales tax on cars was raised from 75% to 83%, but at the same time the government gave tax discounts of as much as NIS 15,000 per car according to the amount of pollution produced. Nitrogen oxide, carbon monoxide, hydrocarbon and carbon dioxide emissions were worked into a formula devised by an inter-ministerial committee that classified car models into 15 categories based on their environmental ‏(“green”‏) scores − category 1 being the least polluting and category 15 the most.

The formula mainly affected smaller, cheaper models, which found themselves placed in the greenest categories, making them cheaper than ever before, with sticker prices falling to NIS 60,000 or less. Since 2009, however, all cars became greener as new European standards required carmakers to manufacture cleaner vehicles, which moved gas-guzzling executive cars and SUVs into the low pollution groups as well. Meanwhile the inflation-linked tax benefit grew, meaning larger tax savings on most car models.

The greener crop of cars, meanwhile, has put a dent in government revenues. In 2011, a record year for the industry with 226,000 new car deliveries, 5% more than in 2010, the tax collected from car sales actually fell 5.33% to NIS 8.4 billion. In 2012 a 9.6% drop in car deliveries meant 12.3% less in taxes paid.

Two years ago the Israel Tax Authority, with the help of the Environmental Protection Ministry, came up with a new formula. The weight assigned to nitrogen oxide emissions, for example, was increased by 57% compared to the old formula, while the weight given to greenhouse gases − which speed up global warming but don’t have any effect on health − was reduced.

Roadblocks

Implementation of the new formula, however, kept running into technical and political roadblocks. It wasn’t until the tax authority threatened to raise the direct tax on cars that the transportation and environmental protection ministers gave the go ahead.

Mini car models that benefited the most from green tax deductions could be the biggest victims of the change. Buyers in this market are particularly price sensitive, willing to drive less powerful and lesser equipped cars to save on costs. The standard-shift Kia Picanto, for instance, will jump from category 2 to category 4, adding up to NIS 3,831 to its price, while the same model with automatic transmission will go up by just one level for a NIS 2,350 price increase.

The Suzuki Swift, however, will stay put and be taxed the same while its little stick-shift brother, the Splash, is likely to go up about NIS 1,600 in price. The automatic Peugeot 208 with a 1.6-liter engine could be hit with the largest tax hike among minis − about NIS 5,000 − by jumping from category 5 to category 9.

The Ford Focus will be the hardest hit by the new green tax regime among family-sized cars: Its leap from category 5 to category 11 will increase the tax bite by NIS 7,026. The Honda Civic is going up by just one step, from category 3 to category 4 and by NIS 2,235 in taxes.

The Nissan Juke’s one step up the ladder won’t add more than NIS 2,000 in tax to its sticker price. Prices for the Mazda CX-5 SUV and the Peugeot 508 executive-size car are expected to rise by NIS 3,500 as the former rises two notches to category 6 while the latter jumps three spots to category 10. The Skoda Superb TSI will jump four rungs, with about NIS 5,000 more in taxes boosting its price to NIS 172,000.

The Mini Cooper will relocate from category 4 to category 8, pushing its cost up by NIS 6,100 to NIS 160,000. But buyers of other small luxury cars won’t feel much of a difference: Tax on the Mercedes A180, for instance, will increase by just NIS 2,250, the same as for the similarly classed BMW − not much for a car already costing around NIS 170,000.

The largest and most luxurious automobiles, making up 1% of the market, will barely be affected by the change since the green tax benefit never really applied to them in the first place. Cars costing over NIS 300,000, however, will soon be hit with another tax − a luxury surcharge − putting the direct sales tax on a sliding scale from 83% to 100%, before value-added tax, of course.

The tax on cars qualifying as hybrids, including rechargeable hybrids, won’t be affected by the change.

Diesel engine cars, although considered to be relatively low polluters, will suffer the hardest blow − perhaps even fatal − from the new formula. The Citroen Picasso C3 minivan, for example, will make the leap from category 4 to category 14 for a NIS 10,826 tax penalty, with the price tag likely to rise from NIS 125,000 to NIS 138,000 after VAT is taken into account.

The sharp increase for diesel-fueled cars is almost universal. The only ones to escape significant price hikes are those already belonging to the highest categories, like the Chevrolet Orlando which will move from category 14 to 15 for a comparatively small NIS 3,000 price boost.

European imports to take hit

Importers of European makes, which specialize in diesel engines, are fuming over the change. They are claiming that the weight given to carbon monoxide in the new formula is too high, while the weights given to fuel consumption and carbon dioxide emissions are too low. But at the tax authority they say that diesel engines are extreme polluters − that “diesel is a bigger killer” − and whoever wants to use it to save on gas will need to pay more when buying the vehicle.

Some importers are saying this could mean the end of the road for diesel engines in the Israeli market. However, when the Euro 6 emission standards take effect and engines are improved, tax breaks could again start rising. It should be noted that diesel engines are considered in Europe to be especially clean. There, however, they only measure greenhouse gases ‏(CO2‏) without taking into consideration pollutants harmful from a health standpoint.

“For 30% of models nothing will happen, and for others the increase won’t be great,” says Eran Yaakov, a deputy director-general at the Israel Tax Authority, who played a leading role in the reform. “I hope that, just like the importers didn’t pass the tax discounts they received onto the consumer, they also won’t raise prices.” Yaakov suggests that importers should “cross-subsidize models.”

Senior automotive industry officials say in response that their purchase price from the manufacturer is calculated exactly according to the tax imposed on the cars and according to competitors’ prices. Therefore, they explain, prices will need to go up.

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Gil Eliahu
Daniel Bar On