When the government changed the way it taxes vehicles to enourage people tod rive smaller, more evironmentally friendly cars, Israelis began buying small two years agoer cars in droves.
Now, officials are ruing their decision, as they watch tax collections on cars shrink.
For now, any revisons in the tax regime are on hold after Environmental Protection Minister Gilad Erdan objected to plans raising taxes on smaller, cheaper, more fuel-efficient cars. But the fight isn't over.
In 2009 the Finance Ministry introduced the Green Tax Reform, which reduced by up to NIS 15,000 purchase taxes on vehicles with relatively low emission levels while significantly raising these taxes for more polluting vehicles.
The Israel Tax Authority established 15 classifications for cars, based on the amount they pollute, and raised purchase taxes from 75% to 83% on the higher-polluting groups. The classification is a "green index" that factors in greenhouse-gas and polluting emissions of carbon dioxide, nitric oxides and carbon monoxide and award "green grades," or scores, to all passenger vehicles.
But over time it became clear that the treasury was too successful in encouraging Israels to switch to more-efficient and less-polluting vehicles. Tax revenues from the sale of new cars fell.
The Finance Ministry, which did not predict this outcome, now wants to revoke some of the tax breaks in order to compensate for the drop in tax revenues from the sale of new cars.
Israelis have increasingly warmed to subcompact and mini cars over the past few years. While the number of new cars sold last year rose by 5%, the combined purchase taxes on cars collected by the tax authority fell 5%, from NIS 8.6 billion in 2010 to NIS 8.3 billion in 2011.
As a result the Finance Ministry decided to change the Green Tax formulas, starting from the beginning of 2013. The plan was to reduce the tax breaks on less-polluting cars and to change the definitions of the various green index categories in a way that would increase the total price of most small cars by at least NIS 3,000.
The treasury was guided by research conducted by Prof. Nir Becker of Tel Hai College for the Environmental Protection Ministry, which recommended giving greater weight in the index to emissions that affected human health and less weight to greenhouse gas emissions.
The new rules would favor gasoline powered engines over diesel engines. Cars with small, highly sophisticated gasoline engines would retain their tax benefits, while diesel-powered cars would receive much higher pollution rankings and be taxed at a much higher rate.
Three weeks ago senior tax officials were to have met with car importers and present them with the new tax regime, but at the last moment the meeting was postponed due to "scheduling problems" at the Tax Authority. The real reason for the postponement, TheMarker has learned, was behind-the-scenes pressure from the Environmental Protection Ministry.
Erdan has no interest in raising the purchase price of cars in general and small, environmentally-friendly cars in particular. He has proposed increasing the tax breaks on cars in the next-to-lowest pollution category, which could lower their final price to the customer. The Tax Authority is examining Erdan's proposal, which would apply to popular models including the Peugeot 107, the Hyundai i20 and the Toyota Yaris.
This was not the first time Erdan has pressure the treasury over vehicle taxes. A month ago Erdan sent Finance Minister Yuval Steinitz a letter asking him to postpone by a year the planned increase in taxes on electric and hybrid vehicles, as their entry into the Israeli market has been delayed.
Purchase taxes on electric-only vehicles are scheduled to rise from 8% to 10% in 2014. The tax on plug-in hybrids will rise from 20% to 30%, and the tax on regular hybrids will increase form 30% to 40%. Erdan also asked Steinitz to apply the tax breaks on company cars for hybrid vehicles also to electric cars.
The Tax Authority said: "The process of updating the green taxation for vehicles was conducted in full cooperation with the relevant bodies, including the Environmental Protection Ministry and the Transportation Ministry. We do not know of any objections by our partners in the process."
The Environmental Protection Ministry declined to comment.
Until the end of 2008 only a few hundred mini-class cars were sold each year in Israel. In 2011 the category made up 8% of the Israeli vehicle market, almost 19,000 cars. Even more are expected to be sold this year: 10,972 new minis were delivered in the first six months of 2012, representing 9.7% of all new car sales. A total of 226,000 new vehicles were sold in Israel in 2011.
While fuel efficiency and lower operating costs are part of the attraction of very small cars the main reason is presumed to be the lower price as a result of lower taxes.
The beneficiaries of the proposed changes include models by Volkswagen, Seat and Scoda with a TSI engine, as well as Ford models with the company's EcoBoost engine, Peugeot and Citroen THP engine models and Fiat's Twin-Air engine. These cars should be only sl
ightly expensive as a result of the proposed change, while even fuel-efficient diesel cars will cost much more.
Among the models that benefited greatly from the tax cuts were the Suzuki Alto, a manual-transmission model of which can be had for just NIS 60,000. Other big sellers were the Peugeot 107, the KIA Picanto and super-minis seeling for less than NIS 75,000.
In 2008 one-third of all new cars sold were in the lower-polluting categories, groups 2 through 6. In 2011, these categories represented 65% of all new-car sales. For the last quarter of 2011 alone the percentage was 75%.
Another measure is the Tax Authority's "green score" for cars: In 2009 the average pollution score for new cars was 195 points. The average fell to 184 for all of 2011 and 170 for the last quarter.
Green is just beginning
Taxes are not the only reason for the decline in pollution ratings. Higher gas prices are an incentive to purchase more fuel-efficient cars, regardless of the initial price. And the global automotive industry has been striving to produce less polluting and more fuel-efficient vehicles for years using such technologies as improved fuel injection, double clutches, continuously variable transmissions, smart gearboxes, super- and turbochargers and plenty of electronics.
"We have only begun to see the beginnings of the green change, and mostly because of gas savings. The driving public is less interested in air pollution," said Lease4U CEO Elihai Eligon.
The Israel Tax Authority noted in its 2011 annual report that the Green Tax reforms initiated in 2009 were meant to be "fiscally balanced," meaning they were not aimed at raising or reducing total tax revenues from new car sales. The agency also said occasional adjustments would be needed, in order to account for technological developments.
"The goal is to get more money," Israel Motor Vehicles Importers Association chairman Yaki Enoch said. "In the first stage of the green taxation the state made a mistake since it did not believe the market would move to small cars. So how do you change it back? You simply raise taxes," he added.