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

Ahead of the upcoming elections in Israel, the Ministry of Finance is quietly advancing a series of new tax regulations targeting the automotive sector, especially vehicles with alternative propulsion systems. These measures aim to address the growing budget deficit by compensating for the expected decline in state revenues from fuel taxes, which are threatened by the increasing adoption of electric and plug-in hybrid vehicles.

Currently, about 40% of new car sales in Israel are electric or plug-in hybrids, which significantly reduce fuel consumption and thus government income from fuel taxes. Although these vehicles still represent only 8% of the total car fleet, projections indicate that by the end of the decade, fuel consumption for private transportation could drop by 15% to 20%, resulting in an annual loss of over 2 billion shekels in fuel tax revenue if no compensatory measures are taken.

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 determine tax benefits for new car models, which will reduce incentives for many hybrid vehicles starting January 2027 and is expected to increase 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 specifically target plug-in hybrids and raise their purchase taxes.

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 cars but have a capped benefit of 22,000 shekels. Additionally, a comprehensive reform of the tax benefits for company cars, which cover about 70% of the 300,000 company vehicles in Israel, could generate significant revenue and influence market demand for green vehicles.

A long-discussed but politically sensitive option is implementing a mileage tax on electric and plug-in hybrid vehicles, which could bring billions of shekels annually but has been repeatedly postponed. The Finance Ministry views this as a ready-to-implement solution that may resurface after the elections if budget pressures intensify.

In summary, while the election period has slowed regulatory changes, the post-election government will likely face pressure to activate these dormant tax measures to shore up state finances amid the transition to greener transportation.