Israeli Finance Ministry Plans to Cut Green Car Tax Benefits, Raising Plug-In Vehicle Prices
The Israeli Finance Ministry is set to reduce tax benefits for environmentally friendly vehicles, particularly targeting the "green tax" incentive, which could lead to higher prices for plug-in hybrid cars as early as 2027. Over the years, the ministry has criticized tax breaks for distorting market demand, costing the state heavily, and benefiting consumers only partially. Currently, three main tax benefits remain: a reduced purchase tax for electric vehicles at 48% (down from 10% originally, compared to 83% for gasoline/diesel cars), a monthly reduction of 600 to 1,300 shekels in taxable value for employees with green company cars, and the "green tax" benefit based on vehicle emission groups, offering up to 15,000 shekels off the pre-tax price.
While the first two benefits are not currently under threat, the "green tax" benefit is a priority target for cuts. Introduced in 2009 as compensation for raising the maximum purchase tax, this benefit assigns vehicles to 15 emission groups based on a complex pollution formula derived from EU data or manufacturer declarations. The benefit is deducted from importers' purchase tax payments rather than given directly to buyers. Initially, it helped increase state revenues and importer profits, mainly for compact gasoline models, but had limited effect on alternative fuel vehicles due to their low supply and high prices.
The recent surge in affordable Chinese hybrid and plug-in hybrid models, which dominate the low-emission groups and benefit heavily from the green tax break, has significantly increased the ministry's costs. In the first half of this year, 56% of vehicles sold belonged to the top green groups, nearly double the rate in 2023. The ministry argues that many plug-in hybrid users in Israel rarely charge their vehicles, resulting in actual emissions comparable to regular hybrids, thus the current formula misrepresents their environmental impact.
To address this, the Finance Ministry's Green Tax Committee plans to revise the pollution formula starting in 2027 to include "secondary pollution" factors such as particulate matter from tire and brake wear. Since plug-in hybrids are heavier, this could push them into higher emission groups, reducing their tax benefits. This approach is unprecedented globally and may face challenges regarding data reliability and environmental relevance. The ministry controls the formula's weighting, allowing it to adjust benefits as desired.
For consumers, this change could mean price increases of over 10,000 shekels for popular plug-in or hybrid models if they move to higher emission categories. Although manufacturers might absorb some costs due to market competition, the overall effect will favor state revenues over consumer savings. The Finance Ministry continues to seek ways to curb tax incentives for green vehicles while balancing political and public sensitivities, especially regarding benefits tied to employee company cars.
