In December 2019, the Tax Authority published a new outline for raising the purchase tax on hybrid and electric vehicles. Like other vehicle reforms formulated in the last two decades, the current outline has been shaped by the well-known “salami method” – the gradual beginning of the tax cut between 2020 and 2025 so that the public does not go into the depths of the issue.
Indeed, the reform has passed under public radar screens, and so far it has also successfully fulfilled its undeclared mission – increasing state revenues from car taxation. Along the way, however, it is also expected to significantly harm some important environmental achievements recorded by the Israeli car market in the last decade, and especially in the subsequent mass transition from a polluting vehicle to a “green” vehicle.
Following the reform, hybrids have already suffered a fatal blow, plug-in cars have quickly lost their attractiveness, and starting in January 2023 the electric car market will find itself in the sights of the Treasury, with the first stage raising the purchase tax from 10% to 20% while lowering the tax ceiling .
Unexpected changes that have affected the automotive market
The plan to raise the purchase tax on electric vehicles was formulated at the end of the previous decade on the basis of a number of basic assumptions that are not already relevant these days. In 2019, the Ministry of Energy published a document detailing the goals of the economy for which it is responsible, with the basic assumption being that battery prices will fall rapidly from 2023, and with them the high production and purchase costs of the electric vehicle.
Among other things, the document reads: “While an average electric vehicle is currently about 10,000 dollars more expensive than a gasoline vehicle, by 2025 there is expected to be a significant drop in prices, mainly due to lower battery costs, which will lead to equal vehicle prices before tax. The electric vehicle, thanks to the continued reduction in the cost of batteries. “
At the time, reform planners could not foresee the huge jump in demand for electric vehicles and lithium batteries (a 680% increase in the last three quarters) that occurred following the Corona. It was also difficult to anticipate the sharp rise in fuel prices and other raw materials, along with the rise in sea transport prices. All this without mentioning the chip crisis, which is disrupting for more than a year the global production and supply of the automotive industry as a whole.
The results of these developments have rapidly changed the electric vehicle market. In the last two months, Chinese manufacturers have raised the prices of lithium batteries for cars by about 20%, and soon after, dozens of Chinese car manufacturers announced the increase in the price of many electric models by thousands of dollars. The increases were also felt in Israel, when the prices of Tesla vehicles manufactured in China soared sharply. It is believed that these increases are just the beginning, and in the coming months the electric models of almost all car manufacturers in Europe, the United States and Korea will also increase.
Penetration rate lower than expected
Demand for electric vehicles in Israel is breaking records, and in the first quarter about 4,800 electric vehicles were delivered – an increase of hundreds of percent compared to previous years. However, the recent price increases and supply disruptions due to the war in Ukraine and the corona closures in China mean that 2022 will be another year of stepping on the spot, not growth.
Already at this stage, the waiting lists for a significant number of electric vehicle models are spread out almost a year ahead, and it seems that by 2022 the penetration rate of the electric vehicle is expected to reach only 6% to 7%. This figure is very far from government forecasts, which predicted an penetration rate of 19% and even 33% by 2025 (about 60 to 100,000 vehicles per year).
It is important to note that due to the shortage of vehicles, the increase in the purchase tax will probably also affect customers who have already ordered electric vehicles in recent weeks, or who are expected to order in the coming months. Car importers can not guarantee a final price for vehicles that are expected to arrive in Israel during the first quarter of next year, and in other words, those who recently placed an order based on a certain list price will probably have to pay more until the vehicle arrives in Israel.
The trams following the hybrids
According to another premise of the reform, even after the purchase tax increase, the penetration of the electric car market in Israel will continue to advance due to inertia, because customers will be willing to pay more for them due to fuel savings and the discount on use value. This assumption is based on the fact that the demand for hybrid vehicles remains high after the purchase tax has risen by tens of percent in the last two years. However, in view of price differences of tens of thousands of shekels compared to regular gasoline vehicles, the demand for hybrids is also now declining.
The result is that the Israeli car market dates back to the pre-hybrid revolution period. Customers tend to prefer more cars with more polluting propulsion systems, importers are reducing the import of hybrid versions due to cost considerations, and one of the great achievements of “green taxation” in the past decade has been gradually erased. It should be noted that what has happened to hybrids is also starting to happen to plug-in models – the purchase tax imposed on them has doubled in the last three years, and from January 2023 will climb by an additional 15% to 55%.
There is no doubt that the process will take place at a more significant pace in the electric vehicle market. While high fuel prices today may help the Treasury blur the impact of the first tax hike on trams, in the long run the growth of the electric car market is likely to be hurt.
The Treasury maintains a low profile
Currently, the ball is in the Treasury’s court. The tax increase reform has been in place and progressing since 2020 automatically. If the Treasury keeps a low profile, ignores the requests of the “green” ministries to delay the tax increase on trams and wait until January, the tax increase will pass without delay.
Israel was one of the first countries in the world to announce that by the end of the current decade, vehicles with internal combustion engines would no longer be sold in its territory, and this announcement gave it a lot of “environmental credit” from important international institutions. Today, however, when the hybrid market does not enjoy a tax benefit, plug-in vehicles are on a similar elimination path, and the tax on electric vehicles is expected to delay market development – the “environmental credit” that Israel has received from many bodies around the world is likely to disappear.
The tax authority chose not to comment on the details of the news.