Israel Updates Green Tax Formula for 2027 Without Expected Car Price Hikes

On Monday, Israel's Ministry of Finance distributed the updated green tax calculation formula for new cars sold in 2027 to vehicle importers. Currently, non-electric new cars in Israel face an 83% purchase tax, which is partially offset by credits based on a complex pollution classification formula. This formula, updated biennially, adjusts tax credits according to emissions levels, with the 2027 update increasing the CO2 multiplier to 220 grams per kilometer and hydrocarbons to 9.77 mg/km, resulting in an estimated 15 to 20% reduction in tax credits for certain models.

Despite initial importer forecasts suggesting price increases due to reduced tax credits, the reality is more nuanced. The tax credit reduction applies only to cars sold from January 1, 2027, and importers have already stocked large inventories of vehicles purchased at favorable exchange rates that can be sold well into 2027 without the new formula's impact. Additionally, importers maintain close ties with fleet and leasing companies, often selling cars to them at pre-update prices, mitigating immediate price hikes.

Market competition also plays a significant role in restraining price increases. The Israeli car market faces intense competition driven by currency fluctuations, rapid technological advancements, new affordable models, and new entrants like Rami Levy in car sales. Consumer apathy toward discounts currently empowers buyers, limiting importers' ability to raise prices.

Furthermore, the upcoming Euro 7 emissions standard, effective November 2024 in Europe, will compel manufacturers to produce cleaner vehicles, which will naturally align with Israel's updated formula. While cleaner technology adds costs, it balances out the reduced tax credits. Importantly, electric vehicles remain competitively priced with a lower 52% purchase tax, providing an alternative if non-electric car prices rise.

In summary, while some price increases may occur, particularly for fleet-oriented models like those from Chery, widespread consumer price hikes are unlikely. Importers are expected to offer discounts and added features to maintain sales, and consumers are advised there is no urgency to buy now fearing price surges.