Treasury plans tax hike for hybrid cars

Moshe Kahlon  photo: Reuters

Reduced tax benefits for hybrid and plug-in hybrid vehicles are among the Ministry of Finance's stopgap measures for dealing with Israel's fiscal blowout.

The Ministry of Finance is planning to reduce purchase tax benefits on hybrid cars, starting in January 2020, as part of a package of cuts aimed at reducing the fiscal deficit. The package will be submitted to the cabinet next week. Sources inform "Globes" that the tax benefit cut will be introduced in an order that will become effective next January, when the temporary order from 2017 signed by Minister of Finance Moshe Kahlon extending these benefits by two years expires.

Among other measures aimed at reducing the budget deficit are using NIS 150 million in revenue from Mifal Hapayis - Israel National Lottery and a NIS 1.15 billion across-the-board cut in the budgets of government ministries. The across-the-board cut is designed to pay for afternoon care for children at a cost of NIS 350 million and a special defense budget supplement. The Ministry of Finance is also planning to implement the subrogation regulations aimed at ensuring that the National Insurance Institute receives the NIS 3 billion it is owed by the insurance companies. The designated sum for 2019 is NIS 1 billion. Excise tax of NIS 2.94 per liter will be charged on solvents. The Israel Tax Authority explains that because solvents have not been taxed up until now, they were illegally used to dilute fuel. Industrial enterprises making legal use of these materials will be exempt from the tax.

The measures are planned to save a total of NIS 3.25 billion, therefore lowering the projected 2020 budget deficit from 4% to 3.8%. "It is important to note that these measures are not designed to solve the problem, but they are the only measures we can take to reduce the problem slightly. We will solve the entire problem in the 2020 budget," Ministry of Finance sources stressed. The new measures will be submitted to the cabinet for approval at its upcoming session.

Taxing hybrid vehicles is designed to save NIS 500 million, while taxing inflammable solvents is designed to save NIS 450 million. Revenue from vehicle taxes will be increased to NIS 1 billion starting in 2021.

According to unconfirmed reports by auto sector sources, the purchase tax on hybrid and plug-in hybrid vehicles will be raised by a modest rate of around 15% initially. The tax ceiling on hybrid cars, which are entitled to tax benefits because they belong to an environmental group of 2 or higher, will be raised from the current 30% to 45%, while the ceiling on purchase tax on plug-in hybrid cars will increase from the current 20% to 30-35%.

The Ministry of Finance will simultaneously publish a new plan for an annual graduated increase in purchase tax on these vehicles over a number of years, until their tax rate reaches the purchase tax rate for conventional vehicles - 82%, net of the environmental tax reductions, according to the pollutant level.

As far as is known, there are no plans at present to cut tax benefits for purely electric cars, on which the current tax rate is only 10%. Among other things, sales of purely electric cars in Israel are negligible, and will remain so next year.

One of the reasons for this measure is the steep rise in the past two years in sales of hybrid vehicles in Israel because of the tax benefits. In the first five months of the year, the market share of hybrid vehicles varied from 17% to 20% of the entire market. The cost to the state of the tax benefits for these vehicles will be around NIS 750 million this year, compared with an initial projection of NIS 600 million.

Sources in the auto sector say that assuming this the tax rate is increased by the planned amounts, the increase in the price of popular hybrid vehicles for the end consumer will be fairly moderate, because the manufacturers will absorb some of the extra cost. The measure, however, is liable to lead in a considerable cut in the discounts for leasing companies, which are the largest buyers of hybrid vehicles in Israel. It is not yet clear whether the Ministry of Finance is planning to retain the benefit in respect of the value of the private use of company-provided hybrid vehicles.

An announcement of a further revision of the environmental tax formula that went into effect in April 2019 is also possible. Such a revision is likely to reduce the tax benefit for all new vehicles, not just hybrid vehicles, to raise the real purchase tax, and to result in a gain of hundreds of millions in revenue for the state.

In response, auto sector sources said that these measures would "throw the baby out with the bathwater," and that raising the purchase tax on hybrid vehicles would significantly reduce their sales, while not necessarily increasing the sales of conventional vehicles, which would ultimately detract from state revenues.

Ministry of Finance sources: We can only ease the problem slightly

Ministry of Finance sources said, "There are no grand or substantial steps here. All of the substantial measures will be in the 2020 budget to be submitted to the Knesset around January. These are difficult circumstances for us, because we should have been in the process of preparing and submitting a budget for 2020 in July for the government's approval. Since this is a transition period and the Knesset has been dissolved, it is almost impossible to narrow the gaps and return to the budget framework. Most of the measures cannot be taken by a transitional government, whether because they require legislation or other measures, or because the outgoing government cannot restrict the incoming one."

As part of the economic update presented to the government in January, the deficit forecast was revised to 3.6% for 2019 and 3.7% for 2020. According to the current revision, the deficit for 2020 will be 3.8%, subject to taking measures to reduce the budget deficit to this level. A 3.8% budget deficit is also projected for 2021. The projected 2019 budget deficit is still 3.6%.

The growth forecast that Ministry of Finance chief economist Shira Greenberg will present is 3.1% for 2019 and 3.2% for 2020. This is lower than the Bank of Israel's projection of 3.2% growth in 2019 and 3.5% in 2020. The most recent revision of the state revenue forecast lowered the forecast by NIS 3.5 billion. In the current revision, the forecast is NIS 363.05 billion for 2020 and NIS 349 billion for 2019. A lowering of NIS 1.5 billion for 2019 and NIS 2.5 billion for 2020 was originally planned, but following the new measures, assuming these are successfully implemented, the new forecast will be unchanged from January.

The reason for slower growth is lower growth in private and public consumption. The labor market continues to be in full employment, and wages are rising by more than the rise in productivity, which jeopardizes the labor market in the long term. The inflation rate is rising moderately. On the other hand, growth in global markets is on a downtrend.

Ministry of Finance sources emphasized, "No one plans to submit a budget based on a 3.8% deficit target. The deficit target for 2020 is 2.5%."

Published by Globes, Israel business news - en.globes.co.il - on June 13, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Moshe Kahlon  photo: Reuters
Moshe Kahlon photo: Reuters
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018