Israel’s Finance Ministry Plans to Cut Green Tax Benefits, Raising Plug-In Vehicle Prices from 2027

Plug-in hybrid vehicles have surged in popularity in Israel, costing the state hundreds of millions of shekels due to green tax incentives. To reduce this fiscal burden, the Finance Ministry is preparing to revise the pollution scoring formula that determines these benefits, starting in 2027, effectively shrinking the subsidies.

Currently, Israel offers three main car tax benefits: a reduced purchase tax for electric vehicles (48% instead of 83% for gasoline/diesel cars), a monthly tax benefit of 600 to 1,300 shekels for employees with green company cars, and a "green tax" benefit of up to 15,000 shekels based on a vehicle’s pollution group. The ministry is targeting the latter for reduction, as it disproportionately benefits plug-in hybrids, which have become dominant in the market due to an influx of affordable Chinese models priced between 140,000 and 170,000 shekels.

The green tax benefit, introduced in 2009, assigns vehicles to pollution groups based on a complex formula derived from European standards. However, the Finance Ministry argues that the current formula underestimates real emissions from plug-in hybrids because it assumes regular electric charging, while many Israeli drivers rely mostly on gasoline engines. To address this, the ministry plans to incorporate "secondary pollution" factors such as tire and brake wear, which are higher for heavier plug-in hybrids, pushing them into higher pollution groups and reducing their tax benefits.

This approach is unprecedented globally and precedes the upcoming Euro 7 standards in Europe. The reliability and environmental impact of these secondary pollution measures remain debated. The ministry’s control over the formula means it can assign significant weight to these factors.

For consumers, this change could mean price increases of several thousand shekels on plug-in hybrids and hybrids, as the tax benefits are calculated on pre-tax prices and amplified by current exchange rates. Some of the cost increase might be absorbed by manufacturers due to market competition, but overall, the state expects to save hundreds of millions of shekels annually. The ministry has avoided cutting other benefits due to political sensitivity, especially regarding company car tax benefits affecting many workers.

The reform reflects the Finance Ministry’s long-standing view that vehicle tax incentives distort market demand and disproportionately benefit importers rather than consumers. The new pollution formula aims to better align tax benefits with actual environmental impact and reduce government expenditure on green vehicle subsidies.