Thinking of buying a new car soon? Read this first

As every year in the summer season, the Israeli automotive industry is in an unofficial recess that usually stretches until after the holidays. However, this year it appears that this traditional "recess" is expected to be longer than usual, against the backdrop of the approaching elections.

The impact of the elections is evident today not only in the slowdown in private car purchases, but mainly in the freezing of regulatory processes that affect vehicle taxation and its future prices. Substantial reforms that were planned long in advance, or that are supposed to come into effect at the beginning of 2027, are being pushed to the corner and promoted quietly behind the scenes. Because of this, importers and customers are left only to guess what will happen to vehicle taxation — especially on "green" vehicles — on the day after the elections.

However, as the well-known proverb goes, every Sabbath has a Saturday night. The deepening deficit in the state budget means that after the elections, the elected government, whatever its composition, will have to start filling the coffers and stir up "dormant" vehicle taxation moves. These are the options currently on the table.

The state is worried about the loss of fuel revenues

In recent months, a professional committee known as the "Green Taxation Committee" has been operating under the radar in the Ministry of Finance. Its goal is to formulate a new and long-term outline for the environmental taxation policy on "green" vehicles — electric, plug-in, and hybrid — in accordance with the state's interests. The emphasis is mainly on dealing with the growing risk of loss of fuel revenues, following the massive transition of the market to vehicles with reduced fuel consumption.

Fuel taxation is considered one of the richest and easiest sources of income to collect. The average mileage in Israel is among the highest in the world, despite the short geographical distances, and most of the public perceives the tax — whose rate is about 60% on every liter of fuel — as a kind of "force majeure", or at the very least as a recognized expense.

It is about big money. The forecast for fuel tax revenues in the budget book stands at about 27.68 billion shekels by the end of the current year — a respectable increase of about 8% compared to revenues in 2025 and an impressive jump of about 49% within a decade. This is despite the fact that the vehicle fleet has grown in that period by only about 36%.

However, today about 40% of total new car sales are of vehicles with electric and plug-in propulsion, which from the Ministry of Finance's point of view are a "poison pill" for fuel excise revenues. Meanwhile, their impact on the overall revenue picture is still marginal because the trend is only at its beginning. The approximately 350 thousand electric and plug-in vehicles currently moving on the country's roads constitute only about 8% of the total vehicle fleet.

According to Ministry of Finance forecasts, the entry of about 135 thousand "electrified" vehicles per year — which mostly replace old gasoline vehicles — will reduce consumption by about 120 to 140 million liters of gasoline per year in the coming years. This trend will bring about a cumulative decrease of 15% to 20% in gasoline consumption for private transport by the end of the decade. Without compensation mechanisms, the loss of state revenues from the fuel tax will reach over 2 billion shekels per year by the end of the decade.

This is not a problem unique to Israel. Many countries in Europe are currently debating how to compensate for the loss of revenue from fuel taxation. The UK, for example, decided only in recent weeks to impose a mileage tax for this purpose starting in 2028.

Plug-in vehicles in the center of the target

At the disposal of the Ministry of Finance today is a limited number of tools that can stop the damage to fuel revenues or compensate for it. All these tools are currently on the table, but not all of them are effective.

The direct tool is raising the fuel excise, but such a step is considered a socio-political "taboo"; it will hit mainly the weaker strata and create a negative inflationary effect.

The second tool, which was already announced this month, is a periodic update of the "green formula". Through this formula, the "green score" of almost all new models imported to Israel is determined, and accordingly the amount of tax benefit they receive. At its base, the new formula has not changed, but the pollutant coefficients weighted in it for the purpose of calculating the score have increased significantly. The meaning on the ground is that many new "green" models will receive a lower green score starting from January 2027 and will lose thousands of shekels of their tax benefit — especially models with hybrid propulsion.

Although this move is expected to bring the Treasury over 500 million shekels per year, it does not constitute a full solution. According to initial calculations, the change will almost not affect the tax benefits for plug-in vehicles, but will hit mainly the regular hybrid models.

However, at the beginning of the month, a new tool entered the Ministry of Finance's "toolbox": the possibility of including in the formula pollutants that are not emitted from the exhaust, and mainly particles originating from tire and brake wear. These are emissions that directly concern plug-in vehicles. Although for now this component remains theoretical in the absence of available data, the information is expected to be received in the coming months as part of the preparation for the new "Euro 7" standard in Europe.

If the Ministry of Finance decides to give this component significant weight in the formula, it will be a "targeted killing" of plug-in vehicles, a move that will effectively raise the real purchase tax imposed on them.

Will the mileage tax pass?

Another move being considered in the Treasury is not renewing the purchase tax benefit on electric vehicles, which is supposed to expire this coming January. This benefit has already become symbolic anyway; although the purchase tax on electric vehicles currently stands at 48% compared to 83% for other types of vehicles, the benefit ceiling in shekels has been cut to only 22 thousand shekels. Therefore, it can be estimated that towards January 2027, a stormy bargaining will again take place on the question of whether to renew the benefit, but in the end it will remain in a cut format, without practical effect on vehicle prices.

Two additional fiscal tools that are on the agenda belong to the category of "political decisions after the elections". The first is a comprehensive reform of the "use value" benefits on a company car, which currently range from about 600 to about 1,300 shekels per month depending on the type of vehicle. According to estimates, about 70% of the approximately 300 thousand company cars in Israel enjoy this value benefit. Since vehicle fleets are also the largest buyers of green vehicles, a cut in the benefit will bring significant amounts into the state treasury and will immediately affect the mix of purchases in the market. However, the value benefit has already become an integral part of the salary format of tens of thousands of company car recipients with political influence, so the chance of its cancellation remains slim.

To this is added the mileage tax of 15 agorot per kilometer, which was supposed to be collected from electric vehicles and plug-in models already two years ago. This is the most logical and efficient way to compensate for the loss of revenue from fuel taxation, but it has been shelved again and again due to political considerations. From the Ministry of Finance's point of view, the advantage of this tax lies in the fact that it is "on the shelf" and only a few months are needed to activate it in practice. Therefore, if the forecasts regarding the "budgetary hole" do indeed materialize, it is not impossible that it will return to the picture after the elections.