Israel Tax Authority Proposes New Levy on Flights to Increase Ticket Prices

Israel's Tax Authority is advancing a proposal to implement a new tax on all aircraft departing from Israel, aiming to address the aviation industry's contribution to global warming and its current lack of taxation. The authority estimates this new levy could add between 12 and 274 shekels to the price of each flight ticket, irrespective of the travel class. This proposal is detailed in a position paper released by the authority's Planning and Economics Division, intended for upcoming discussions on the state budget.

The proposed tax would be calculated based on the aircraft's weight and flight distance, with the Tax Authority estimating it could generate approximately 1.1 billion shekels annually for the state. The paper argues that the aviation sector contributes significantly to greenhouse gas emissions in Israel and generates pollution and noise, necessitating investments in public health and infrastructure. Currently, international flight tickets are exempt from VAT, and aviation fuel is exempt from excise tax, while international offset mechanisms are deemed insufficient by the authority.

The tax would initially be levied on airlines, ranging from about 1,300 shekels for a small aircraft on a short flight to approximately 100,000 shekels for a large aircraft on a long-haul flight. The authority anticipates that airlines will pass these costs onto passengers, though the final decision on how much to absorb versus transfer rests with each company. For instance, a Boeing 737-800 flight to Athens might incur about 9,400 shekels, while a Boeing 787-9 flight to New York could cost around 64,500 shekels.

Passenger costs are projected to vary by distance: flights up to 500 km (e.g., to Jordan and Egypt) could see an increase of about 12 shekels; flights between 500 and 4,000 km (most of Europe, Turkey, the Gulf) around 58 shekels; and flights over 4,000 km (USA, East Asia) approximately 274 shekels. These figures are based on 2023 economy class ticket prices, representing an estimated 4-5% increase. The authority suggests making it mandatory for airlines to disclose this tax amount to customers during ticket purchase. The calculation does not differentiate between travel classes, meaning economy and first-class passengers would face the same additional cost. The Tax Authority estimates that 86% of passengers would pay up to 58 shekels more, with a quarter of the tax burden falling on foreign residents and another quarter on the top income decile.

Similar taxes on departing flights exist in countries like the UK, France, and Germany, intended to reflect the environmental impact of air travel, although Sweden recently repealed its tax. The Tax Authority rejected taxing aviation fuel due to potential conflicts with international agreements and the risk of airlines refueling elsewhere. An alternative proposal for a per-passenger or per-exact-distance tax was also dismissed in favor of the simpler aircraft-based tax, which provides airlines with predictable costs.