In the past few days, "Globes" has been flooded with phone calls and e-mails asking, "What will happen to car prices on August 1?" Almost every potential car buyer has heard about the "green tax update", but it is still an enigma for most people. How much will prices rise? Will they rise? On which models?
On the eve of the new taxes, nobody can give an authoritative and precise answer. No importer has published a new price list for August 1, and no one will commit to prices. Some importers are waiting for competitors to make the first move, but the truth is that the delay in publishing the price lists is to partly fully exploit the present jump in sales. Uncertainty and "popular rumors" about price hikes have great marketing value, and every salesperson wants to make a bundle by exploiting the buying panic to the max.
Nonetheless, it is possible to make some educated guesses about the volatility in car prices at the weekend. For our readers, below is a synopsis.
What is the green tax?
"The green tax" is not a tax at all, but a tax break that provides incentives for low-emission cars. In 2009, the Ministry of Finance decided to end the multiyear reform to cut the purchase tax on new cars, and raised the rate back to 82%. In exchange, it announced a reform aimed at selectively lowering the purchase tax on low-emission cars. It established a complicated formula (which is unique to Israel) of car emissions, which gives a "green grade" for every new car.
New cars were classified into 15 categories on the basis of their green guide, and a graduated tax break, ranging from zero to NIS 15,000 was set for each category. The calculation was made directly with the importers, so that consumers could not know how the tax credit precisely affected the price of the car they were buying. The Israel Tax Authority said that the lack of transparency was exploited by some importers to increase profits or give discounts to leasing companies.
The green tax break reform was a success and boosted sales of small and cheap cars. But two years ago, the Ministry of Finance concluded that the loss of revenues from the reform was too much - NIS 1.5 billion a year or more - and it had to reduce the tax break. This truth to this claim is inaccurate. The green tax break greatly boosted new car sales in Israel in the past three years, an increase that offset most of the loss from purchase tax revenues, if not all of it.
The Ministry of Finance decided to reduce the tax break, and set a new emissions formula, using the "target" method; i.e. the ministry first set a tax revenues target (NIS 400 million a year), and then derived a "scientific" formula of emissions to reach it, more (presumably) or less. Since the green tax break had already become part of the pricing of many new cars, reducing the tax break for importers will result in higher prices from August 1.
Which car categories be affected?
Because the tax break is capped at only NIS 15,000, its importance falls as the price of car rises. It is a regressive reform: it mainly affects inexpensive popular cars that cost up to around NIS 130,000, while having a negligible effect on more expensive cars which do not benefit from the tax break in any case. Therefore, the higher prices will affect urban mini cars, super mini cars, and various family cars, but will have almost no effect on the prices of cars in the SUV, executive, and recreational categories, which cost more than NIS 160,000. Some SUVs and minivans will lose their tax break of thousands of shekels, but because these segments are more profitable for importers, and the effect on leasing companies is minor, most of the change will probably "be absorbed".
What will happen to car prices on August 1?
This is where things get complicated. There is no argument that prices for popular models will rise for importers on August 1. The new emissions values that the Ministry of Finance has set for most imported models drop them by one to six grades, which means that the importers' tax benefit will be reduced by NIS 1,500-3,500, including VAT. An importer has three options: raise the price for consumers; absorb the extra cost in whole or in part; or reduce the discounts for leasing companies for the models that they buy.
The third option is the least likely. The leasing companies are still the biggest buyers of new cars that cost less than NIS 130,000, and an importer who cuts its discount on important models for them by 5-10% is liable to suffer a critical loss of sales. We can assume that some importers will decided to absorb part of the price hike, and lower their profit margins, but the situation will vary from one model to the next. Models that are likely to face a tax break reduction of NIS 4,000-5,000 cannot keep the same price.
On the other hand, the new tax code grants importers a grace period. The old green tax break will apply to all cars held in inventory on August 1. Therefore, the absorption capacity of importers with large inventories will be greater.
But anyone who thinks he can go to a dealer and ask for an "August car" is mistaken. Consumers cannot know whether the car is new or from inventory. It is also possible that some versions, accessories, and colors of the same model will be from the inventory, while others will be "newer". Most importers will therefore opt for discounts, i.e. absorbing a smaller part of the price hike, especially for models with big inventories, and roll a small part of the price hike on to the discounts for institutions, and roll part on to consumers. We can therefore assume that, on August 1, the price hike will be less than initially expected, amounting to NIS 1,000-2,000, or even nothing, for most popular models.
What is the two-step theory?
Many importers believe that the price hikes on cars because of the reduced tax break will happen in two steps. In other words, there will be a small change, if any, on August 1, but in September, there will be another price hike. Other importers believe that most of the price hike will be postponed by a full quarter, to January 1, 2014, when all prices lists are updated. In either case, anyone taking a sigh of relief in August should realize that it is only temporary.
What will happen to people with company cars?
Although prices for some cars will go up on August 1, and even though the use value of company cars is derived as a percentage of the consumer price list, people with company cars will not be immediately affected. But on January 1, 2014, the use value will be recalculated on the basis of the new price lists, at which point people with company cars will face a jump of several percent in the monthly use value. Before that happens, contract prices for leased cars will rise because of the higher prices for cars and the changes in the amortization regulations for leasing companies, which will cause higher contract prices on August 1.
What will happen to diesel cars?
The new green tax formula is a big blow to diesel cars, as the tax break on them will shrink by NIS 8,000 or more. Importers cannot absorb such a big change, and prices will jump on August 1. This means the extinction of one of the most fuel-efficient segments in the car market. But for the Ministry of Finance, this is collateral damage.
Published by Globes [online], Israel business news - www.globes-online.com - on July 31, 2013
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