Israel Plans New Car Tax Measures to Offset Fuel Revenue Loss After Elections

As Israel approaches its upcoming elections, the Ministry of Finance is quietly advancing new tax regulations targeting the automotive sector, particularly focusing on vehicles with alternative propulsion systems. These measures aim to address the growing budget deficit by compensating for declining state revenues from fuel taxes, which are threatened by the increasing adoption of electric and plug-in hybrid vehicles.

Currently, fuel tax is a major source of government income, with an estimated 27.68 billion shekels expected by the end of 2026, marking an 8% rise from 2025 and a 49% increase over the past decade. However, about 40% of new car sales are now electric or plug-in hybrids, which significantly reduce fuel consumption and thus tax income. The Finance Ministry forecasts that by the end of the decade, gasoline consumption for private transport could drop by 15% to 20%, resulting in a loss of over 2 billion shekels annually if no compensatory measures are implemented.

To mitigate this, the Finance Ministry’s "Green Tax Committee" is considering several options. One already announced change involves updating the "green score" formula used to calculate tax benefits for new vehicles, which will reduce incentives for many hybrid models starting January 2027, potentially increasing state revenues by over 500 million shekels annually. Another potential measure is including non-exhaust emissions, such as tire and brake wear particles, in the tax formula, which could particularly impact plug-in hybrids.

Other fiscal tools under consideration include ending or reducing purchase tax benefits for electric vehicles, which currently stand at 48% compared to 83% for other vehicles but have a capped benefit of 22,000 shekels. Additionally, reforms to the "benefit in kind" tax on company cars, which affects about 70% of Israel’s 300,000 company vehicles, could yield significant revenue but face political resistance. Finally, a previously proposed 15 agorot per kilometer road usage tax on electric and plug-in vehicles, expected to generate billions annually, remains shelved due to political concerns but could be reinstated after the elections.

These tax policy shifts reflect Israel’s efforts to balance environmental goals with fiscal realities as the country transitions to greener transportation amid budgetary pressures.