For decades, Israel’s purchase tax on cars was a locked Pandora’s Box that no one dated open. Although the economy developed and government expressed an interest in “easing the tax stranglehold”, generations of Ministry of Finance officials preferred retaining the 95% tax rate, mainly because of the difficulty in weaning off the cash cow that generated more than 10% of the country’s tax revenues.
Three years ago, the box was opened when the Ministry of Finance announced reforms aimed at gradually reducing the purchase tax on new cars from 95% to 74%. The reform was accompanied by an in-depth analysis of its effects on tax revenues and an assessment that higher car imports and sales would, in the long run, make up the temporary loss in revenues.
That report failed to cover the external costs to the country from the rapid increase in the number of cars - specifically the greater traffic and air pollution. At the time, global warming was not yet in the headlines, and the environmental impact was not a fashionable topic, with the media ratings it now enjoys.
The tax reform and cutting has gone ahead as planned. The first tax cut passed with almost no effect on the Israeli public. However, the second tax cut, in January 2007, which was accompanied by a large cut in the value use of company cars, resulted in a sharp drop in car prices. Car sales since January are up almost 25%, and there is a constant shortage of popular models.
It is not possible to attribute all the jump in cars sales this year to the tax cut, because other factors have played a role. These include the rapid growth in the car leasing and rental markets. However, a recent report by the Ministry of Finance State Revenue Administration includes an assessment that indicates the possible extent of the direct impact of the tax cut on the increase in the number of cars on the road.
The State Revenue Administration examined the number of vehicles per 1,000 persons in Europe as a function of the tax rates on cars, and compared with the figure for Israel. The report concluded that the tax might increase the number of cars in Israel by 19% when the reform is completed.
Such a large increase in the number of cars has far-reaching effects on traffic and air pollution in city centers during rush hour.
The Israel Tax Authority said in response, “It is necessary to take into account the changes in the amount of traveling. In the end, regarding infrastructures, the figure about the growth in the vehicle market is only relevant proximate to the figure which indicates the change in the situation, and is almost valueless in itself.”
However, it is hard to argue with the traffic jams and smog or with the projections by the vehicle sector that 200,000 more cars will be added to Israel’s roads next year. These circumstances underscore the urgency for implementing the so-called green tax reform, which is now fighting for survival. Even if limiting the number of cars on the road is a lost cause, it is not yet too late to rationalize their use.
Published by Globes [online], Israel business news - www.globes.co.il - on October 14, 2007
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