Two Unbelievable Reasons Why Israel’s Crazy Car Tax Makes Sense

Car taxes in Israel are high. Like highest of any non-Danish OECD country high.  In 2015, on average, Israelis paid almost an 80% purchase tax on cars (down from over 100% in 2005). With news that a tax rebate for environmentally friendly cars is going to be harder to receive, I thought it might be useful to delve into car taxes, why they exist and some alternatives that the government could choose. It turns out that they’re not entirely the work of the devil. However, we should all pray for the speedy arrival of the trains. Let’s look at the numbers (charts below. Most of the info was taken from this OECD working paper and this document).

There are two main rationales for taxing cars at high rates. One is that these taxes bring in a ton of cash for the government. In 2012, car and gas taxes consisted 3.6% of GDP or 33.7 billion NIS. That money can be then spent on transportation infrastructure, which is good for the tax payers.

The second is that these taxes also counteract the hidden effects that cars have on the economy (pollution, congestion, accidents, global warming, noise, maintaining infrastructure, parking spaces in the place of buildings). These costs add up to around 6% of GDP in Israel (people actually sit around making these estimates, I promise), meaning that even with the high rates there’s still a gap of about 2.4% between the taxes collected from car owners and the damage they cause to the economy. The gap expresses itself in the form of medical expenses, reduced property values and the cost of products in city centers and malls which need to provide parking.

Despite this gap, the government doesn’t want to raise taxes too high. Higher taxes cause people to drive older cars for longer. These cars tend to be less safe and emit higher amounts of harmful chemicals. Higher taxes also lower rates of car ownership, which are already among the lowest in the OECD forcing people to live in high population density areas, thereby exacerbating the housing crisis.

Therefore, the best solutions to lower that gap should be found elsewhere, namely trying to reduce the damage done by car ownership. One attempt that has been fairly successful has been to give a tax rebate for people who purchase cars that emit low levels of emissions.  The rebate has succeeded in reducing emissions of the most harmful chemicals. Although the rebate has also had the effect of leading to the purchase of more cars, a problem in Israel which has the highest rate of congestion in the OECD (Come to Israel! High rates of congestion, low rates of ownership! The Tel-Aviv-Jerusalem train network can’t come quickly enough). Every few years the rebate is updated to force consumers to buy increasingly more eco-friendly cars.

Other solutions include improving public transportation (taking it out of the hands of Egged for instance. I swear with the hours I have spent waiting for Egged busses I could have written 10 posts about how a monkey making random decisions would be a better manager for the Jerusalem bus system than Egged) and paying money to people for their older cars, though both of these cost large amounts of money and may require tax increases elsewhere. Creating more inter-city toll roads to keep cars as local transportation tools and focusing on trains for inter-city transport could also be a major development. Finally, some people may choose to dance with the devil and purchase electric bikes, but we at Kalpi would never condone such actions.

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