Automotive reforms:A Day Late and a Shekel Short

Jumping gasoline prices tend to be blamed on Iran and sundry geopolitical issues, but half the pump price is VAT and excise taxes.

Shuki Sadeh
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Shuki Sadeh

Israel's automotive industry is another area where reforms seem a day late and a dollar short. A team headed by Yaron Zelekha, the outspoken former accountant-general at the Finance Ministry, was asked to promote competition in the concentrated sector. His team handed down its recommendations in February.

Importers with market shares of 8% or more shouldn't be allowed to import from more than one manufacturer, the team recommended. Nor should they own a leasing company.

A press conference by a team headed by Yaron Zelekha, right, that was asked to promote competition in Israel's automotive industry.Credit: Ofer Vaknin

Well and good, but the leasing companies could foil these initiatives en route to the Knesset.

Things like pension funds' management fees may be bewildering. The price at the pump is not. Transportation comprises 25% to 35% of Israeli households' spending, compared with 15% in the United States. The worst sufferers are households where the breadwinner has to commute to work in the center of the country.

Jumping gasoline prices tend to be blamed on Iran and sundry geopolitical issues, but half the pump price is VAT and excise taxes. Four years ago, oil cost more than now but gasoline cost less because tax was lower.

As the public howled, the government cut the fuel tax, to the Finance Ministry's dismay. Tax on fuel is collected right at the pump; no dodging is possible.

"If gasoline tax drops hard, we'll have to find the money somewhere else," shrugged an official at the Prime Minister's Office. "We've shaved these taxes slightly over the past few months. Compared to Europe, gas prices in Israel aren't high. Plus, fuel creates pollution, so it shouldn't be too cheap."

Vehicle maintenance is also expensive because of heavy purchase taxes and the lack of competition. Car importers have become multimillionaires, if not billionaires, thanks to "outrageous profit margins," as Zelekha put it.

He began studying competition in the car sector last August. His team submitted its recommendations about a month and a half ago. Beyond the recommendations noted above, the committee suggested that companies other than official importers be allowed to import spare parts that aren't directly related to vehicle safety.

The committee's recommendations have drawn fire. Some have been called too far-reaching or impossible to implement. "My reform isn't far-reaching. It's the minimum," Zelekha says. "Is the minimum more than the government is able to pass? We'll see, because they're still working on implementation."

Among the players keen on most of the recommendations are repair shops, which are penalized by the concentration and importers' excessive power. "It's a lose-lose situation," said Ronen Levy, head of the repair shops union. "The customers flee us because of the high prices, and the police tell us that thousands of people head into the Palestinian territories on Saturdays to have their cars serviced for less, even though many of the shops there use parts stolen from Israeli cars."

Beyond the lack of competition, a key factor pushing up car prices is the high purchase tax, among the highest in the West. Between 2005 and 2009, the authorities worked to cut this tax but later decided to do so mainly for less-polluting vehicles. Currently, the purchase tax is set at 80% of the car's price, which is five times the rate in Europe.

A senior source in the car sector says cutting this tax could dramatically reduce car prices. "The troubles begin with the high taxes. Until a decade ago, taxes on appliances were also particularly high - things like washing machines, ovens and electronics. Now the prices have dropped due to the sharp cut in taxes. This could happen for cars, too."

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