Cars targeted to fill budget hole

Dubi Ben-Gedalyahu

The Finance Ministry knows the numbers very well, and it knows that 1% increase in the purchase tax on cars is worth NIS 125 million a year in revenues.

"The Israeli public is living in a fools' paradise," a top Ministry of Finance official told "Globes" in late November. He hinted that, despite the elections, the ministry was working hard on an aggressive tax plan to cover the deficit.

The official said. "The elections party is creating a feeling of immunity from austerity, and every politician who wants to be elected dispenses optimistic forecasts about growth and prosperity. But whatever government is formed will have to quickly close the huge budget deficit."

At the time, it was believed that some of the first measures on the list would be taxes on cars and fuel - two sure paths to boost the government's revenues. This is because the demand curve for cars and their use in Israel is very inelastic. In other words, strong demand for new cars is resistant to frequent tax changes.

The Ministry of Finance knows the numbers very well, and it knows that 1% increase in the purchase tax on cars is worth NIS 125 million a year in revenues directly, plus tens of millions of shekels more in side revenues, such as higher revenue from the use value of company cars caused by higher car prices.

"Globes" assessed that the plan to deal with car taxes after the elections would be in two steps. First, the green taxes, which the government has already approved would be updated, which would increase the real taxes on some cars and generate NIS 400 million a year in revenues. "Globes" added, however, that given the deficit, this would not be enough and that there were probably contingency plans for step two: raising the purchase tax cap on new cars by as much as 4-5% to its historic level of 87%.

The elections are now behind us, and it comes as no surprise that the plans are being pulled out of the drawers. They are not in finished form and not all the I's have been dotted and t's crossed, but the structure is clear: the Ministry of Finance's constant and reliable cash cow will be required to give a few more liters of indirect taxes to the effort to close the budget hole.

In ordinary times, we would expect socially-oriented MKs to block such measures, which will sooner or later have to go through the Knesset Finance Committee. But there is a climate of economic emergency, and since all the parties and MKs have made promises to their sponsors and sources, and now have to pay the piper, they will all want to top off their tills.

It is almost certain that the tax hike on cars, if and maybe when, it is passed will be covered in social messages of marvelous fairness: the "jeep tax", or the "environment tax" or "the polluter pays", and all the other inventions by the spinmeisters. But the bottom line is that new cars will cost more, and not just a little bit more, because of the higher purchase tax and updated green taxes, which will be carried out either separately or together.

Although there is a risk that customers will prefer to postpone the purchase of a new car, and that the new car market will crash, and that the government will emerge the loser, but unless you try, you don’t know. Isn't that how the system works?

Published by Globes [online], Israel business news - www.globes-online.com - on February 6, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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