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BANK OF ISRAEL
Office of the Spokesperson and Economic Information
The following is an excerpt from the Bank of Israel Annual Report, which will
be published on March 30, 2011:
Environmental taxes
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The inelasticity in the use of private vehicles and insufficient public
transport have made the environmentally related taxes on vehicles and
fuel into a major source of tax revenue for the government, without
reducing negative externalities.
The combination of a high purchase tax on vehicles and a high excise tax
on fuel may limit the ability to use them to increase tax revenues in the
future.
Environmental taxes that do not derive from fuel consumption and the
vehicle industry should be extended, to provide incentives to use advanced
methods for waste disposal and reducing pollution.
In recent years, a number of environmentally related taxes have been raised in Israel
instead of direct taxes, which have been reduced. A comparison with other developed
countries shows that in 2008 the revenues from environmental taxes, in terms of
percent of GDP, were high relative to the average for the other OECD countries,
primarily due to the taxes on vehicles and fuel consumption. This is the result of a
combination of the high purchase tax on vehicles and the high excise tax on fuel, as
well as insufficient public transport, which forces most of the population to rely on
private vehicles. The result is inelastic demand for fuel relative to its price, which has
led to the environmental taxes on vehicles and fuel consumption becoming a major
source of income, without being effective in eliminating negative externalities. In
contrast, environmental taxes other than those on vehicles and fuel constitute a
negligible share of the total revenue from environmental taxes in Israel, as is the case
in most developed countries. Income from these taxes is expected to grow in the
future, as a result of the new environmental laws that apply to waste disposal.
In January 2011, the tax on fuels was raised by 20 agorot in order to reduce
government budget deficit. In February, the government cancelled the increase for
gasoline (as opposed to diesel and other fuels) and directed the Minister of Finance to
locate sources for the cancellation of the increase planned for 2012 (for gasoline). The
increase in the excise tax on other types of fuel was left in place. Even after the
increase in the fuel tax, its proportion of the consumer price of gasoline (43 percent) is
similar to the average for non-oil-producing developed countries (Figure 2).
Nonetheless, the combination of a high purchase tax on vehicles and the recent
increases in the fuel tax have apparently limited to a large extent the ability to use
these taxes in order to increase revenues in the future.
POB 780, 91007 Jerusalem Tel: 972–2–6552713
www.boi.org.il
At the same, two reforms of vehicle taxation went into effect in 2009. In August 2009,
the “Green Taxation” reform went into effect, which changed the method of
calculation of the purchase tax on vehicles. As a result, the tax rate, which was
previously uniform, is now dependent on the vehicle’s emissions. In addition, in
January 2009, the system for the company car tax credit was changed to a fixed
proportion of the value of the vehicle, which, as of January 2011, stood at 2.49
percent. The goal of the two reforms is to reduce emissions by encouraging the
purchase of cleaner vehicles. At the same time, the effect on the tax burden is
expected to be relatively small.
Initial figures show that the Green Taxation reform has contributed to the reduction in
air pollution without changing the tax burden. This was accomplished by a shift in
demand, which resulted in a decline of 5 percentage points in the purchase of highemission vehicles and a similar increase in the purchase of low-emission vehicles (“A
Year since the Green Tax Reform on Vehicles”, Ministry of Finance, August 2010).
This is in contrast to the increase in the fuel excise tax which has only a very small
effect on demand.
The proportion of other environmental taxes, which are unrelated to vehicles and fuel,
within total revenues from environmentally related taxes is negligible (the average for
the developed countries is 3 percent). Israel, like many other developed countries, is
in various stages of implementing reforms to increase these taxes and they are
expected to account for a larger proportion of tax revenues in the future. The reforms
include an increase in levies on sewage, waste disposal and the restoration of
abandoned quarries, as well as the introduction of congestion taxes and taxation of
emissions of pollutants.
Of the other environmental taxes, the tax on landfill for household waste is the most
significant. The price of landfill in Israel has been very low until now relative to the
developed countries and as a result there has been little incentive to shift to more
advanced methods of waste disposal. In December 2010, it was decided to gradually
raise the landfill tax for mixed household waste by NIS 10 per ton each year, up to a
level of NIS 90 per ton in 2015 (before VAT). In 2010, the Knesset passed the
Packaging Law, which expands the scope of the Deposit Law, and the Tire Recycling
Law, both of which impose the responsibility for recycling products on the
manufacturers. Waste disposal laws are expected to increase the proportion of other
environmental taxes in total environmental taxes, which is expected to reach 0.16
percent of GDP in 2015.
Figure 1: General government revenues from environmental taxes in 2008
by country and type of tax (percent of GDP)
Energy*
Vehicles**
Other***
5.0
4.5
4.0
3.5
3.2
3.0
2.2
2.5
2.0
1.5
1.0
0.5
United States
Chile
Canada
New Zealand
Japan
Spain
France
Australia
Poland
Belgium
Slovak Republic
Iceland
Switzerland
Greece
OECD average
Germany
United Kingdom
Ireland
Norway
Austria
Luxembourg
Korea
Italy
Sweden
Portugal
Slovenia
Czech Republic
Finland
Hungary
Israel
Turkey
Denmark
Netherlands
0.0
* Including taxes on fuels for vehicles and industry and levies on air pollution from the use of energy.
** Including the purchase tax and duties on the purchase of vehicles and their spare parts.
***Including the sewage tax, the landfill tax, the mining and quarrying levy, the quarry restoration levy, congestion taxes, and the
deposit on empty bottles.
Figure 2: Fuel excise tax as a percentage of the consumer price of 95-octane
gasoline in the developed countries as of the second quarter of 2010 and in Israel
as of January 2011
50
43.3
42.1
40
30
20
10
Netherlands
Germany
United Kingdom
Switzerland
France
Greece
Israel 1/2011
Finland
Israel
Ireland
Norway
Belgium
Portugal
Sweden
Italy
Korea
Turkey
Slovak Republic
Austria
Czech Republic
Denmark
Luxembourg
Spain
OECD average
Hungary
Poland
Australia
New Zealand
Canada
United States
-
Source: International Energy Agency, the Ministry of National Infrastructures, the Ministry of Finance and processing by the Bank of
Israel.
Percentage of the consumer price
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