Israel Tax Authority Proposes Novel Flight Tax to Boost State Revenue

The Israel Tax Authority has recommended that the government implement a new tax on outbound flights, calculated based on aircraft weight and flight distance. The theoretical justification for this tax is to address the significant greenhouse gas emissions from aviation, noting that jet fuel is currently untaxed. The authority estimates that the tax could generate approximately 1.1 billion shekels annually for the state treasury. Furthermore, they project that a quarter of the revenue would come from foreign residents and another quarter from the highest income deciles, while lower income groups, who fly less, would contribute less.

However, the proposal faces significant criticism regarding its practical implementation and potential consequences. Experts suggest the tax may not effectively reduce emissions and could even increase them. Concerns have been raised about its impact on foreign airlines' willingness to operate in Israel, potentially leading to fewer direct flights, reduced competition, and increased ticket prices. There are also doubts about the proposal's compliance with international aviation agreements, which generally discourage taxing jet fuel and favor international coordination on emission reduction efforts.

The Tax Authority explored alternative taxation models, including a excise tax on jet fuel, which could yield even higher revenue. However, this option was deemed unfeasible due to contravention of international agreements and the risk of airlines avoiding refueling in Israel, potentially shifting business activity and increasing overall emissions. The proposed weight-and-distance model, while novel, has also been questioned for its economic distortions, such as taxing a short flight to Rhodes the same as a longer flight to London. It also fails to differentiate between passenger classes, thus lacking incentives for travelers to choose less polluting options or for airlines to reduce premium seating.

Ultimately, the article suggests that while the proposed tax is creative, it may not solve the fundamental issues of emission reduction and could inadvertently increase emissions by making certain routes less viable. Airlines might opt for shorter flights from Israel, requiring Israelis to take longer, more polluting connecting flights. The reduction in routes could also harm competition, potentially benefiting domestic carriers like El Al. The burden of the tax is likely to fall on consumers, either through higher ticket prices or reduced competition, despite the Tax Authority's intention to tax the aircraft itself.