Israeli tax hikes will make EVs too expensive for most

At last week’s Globes Israel Business Conference, Ministry of Finance deputy to the state budget director Iliya Katz explained why Israel is doubling purchase tax on electric vehicles from 10% to 20% in January 2023. The main reason was that electric vehicles are significantly cheaper for routine maintenance compared with gasoline fueled cars on which there is 83% purchase tax and this encourages car travel. Katz said, “Our aim is not to fill the roads but to encourage travel on public transport.”

All this left us confused. Not because of the comment that, “Electric vehicles cause jams,” which we have already heard from many Ministry of Finance officials, but because only a month ago the Acountant General, who represents the Ministry of Finance committed to switch the government’s car fleet to electric vehicles. The announcement said, “The government fleet totals 15,000 vehicles including Israel Police, the prison and fire services and various government ministries. The Government Vehicle Administration is already committed to procure only electric vehicles for the government fleet from 2025.”

In the announcement the Accountant General is quoted. “The measure has received and will receive international ramifications.” The assets division director added, “We are proud to stand together with leading and parallel government bodies in the fight against the climate crisis in the field of government vehicles.”

So what are we meant to understand from all this? That privately owned electric cars cause traffic congestion but government vehicles do not? Or that the government target set in 2018 to switch the entire Israeli car market to electric vehicles by 2030 was a mistake.

But the excuses for collecting electric vehicle taxes are not what is really upsetting about the entire matter, but rather the fact that the Ministry of Finance’s taxation policy on electric vehicles produces a socio-economic distortion. In other words, the government turns the “right” to own an economical electric vehicle or a modern vehicle in general into a privilege of the upper strata of the population and owners of company cars. All this while most people have to pay dearly for fuel-wasting and polluting vehicles – or travel by public transport.

“Market forces will push the market towards electric vehicles even after the tax increase,” added the budget department official at the Globes Israel Business Conference. This is no longer an excuse, but simply a disconnection from what is happening in the world, an attitude that is quite disconnected from what is happening on the ground. In practice, market forces have mainly made electric vehicles and new vehicles more expensive in the last two years and kept them out of reach of the pocket of most people.

The energy crisis hits

The cost of energy is an integral part of the cost of vehicle manufacturing in the world, starting from the production phase of raw materials such as aluminum and steel, to the manufacturing and transportation phase. In previous years, the relative weight of this component in the cost of vehicle production was negligible. However, in the past year energy prices in Europe soared dramatically – the wholesale price of gas for industry became 13 times more expensive and the weight of the energy component in the cost of vehicle production jumped.

According to a S&P Global report published at the start of the month, the price of the energy required to produce a car has risen by about €50 on average to over €700 today, and this could be just the start. The report also said that this coming winter, which is expected to be particularly cold, the energy crisis in Europe will worsen and lead to a loss of production of almost one and a half million vehicles from planned levels.

The situation may lead to a severe disruption in the car supply capacity of the European car-making industry, which has not yet recovered from the many other disruptions over the past two years, chief among them the chip shortage and the Corona crisis. The European car industry also includes leading manufacturers from Japan and Korea, such as Toyota, Hyundai and Kia, which supply Israel with tens of thousands of vehicles from European production plants.

The bottom line is that there will be less cars at higher prices, and electric vehicles in particular.

Lithium prices breaking records

Last week the prices of lithium, the main raw material for the production of electric vehicle batteries, continued to break records in the world markets. The price of lithium carbonate for batteries is currently at $77,000 per ton, an increase of 188% over the last 12 months, and an increase of almost six times compared to the start of 2021

The main reason is the rising demand for electric vehicles and the frantic race by automobile industry giants and governments worldwide to secure a supply for themselves. The good news is that the analysts estimate that in the next two quarters the volume of lithium production in the world will grow significantly, reducing the price towards $50,000. On the other hand, the bad news is that due to the high demand for electric cars, even the drop in the production price, if it happens at all, will not be able to stop further increases in the price of lithium batteries, whose price makes up almost 50% of the total cost of an electric vehicle.

This process is already underway. Only in the last few days, popular Chinese models in Israel and new European models such as Volkswagen’s ID4 have become more expensive. All this before the planned purchase tax hike in January.

Chip market war

In early summer, it seemed that the chip shortage that had severely hit global car production was ending. The expectation was that in 2023 the scale of production would begin to return to normal and together with the recession, the gap between demand and supply would narrow. But then the US and China, entered into a new trade war and the deck was reshuffled. At the start of October, the US government published a series of export restrictions to China on technologies for the production of essential chips, some of which are also used by the car industry.

The restrictions, which in the first phase mainly concern areas such as AI, encryption and data centers, are now also focused on equipment for the production of chips, which are also used by the car industry. These include logic chips in 16 nanometer technology and smaller, DRAM chips below 18 nanometer and larger 28 nanometer chips, excluding those allowed for export.

Major chip manufacturers and suppliers worldwide are scurrying to adapt to US guidelines, and this process is expected to be felt on two levels. In the short term, the Chinese government and industry are expected to try to obtain very significant stocks of chips from every possible source. In the long term, there may be a new shortage of chips in the Chinese car industry, especially in the electric vehicle segment, in which the country leads. Both of these processes may push up chip prices and create supply difficulties again.

Bottom line, the market situation completely contradicts the Israeli government’s assumption that led in 2018 to the formulation of the multi-year tax plan to increase the tax on electric vehicles in the coming years. That is, the assumption that “market forces” will lead to a dramatic drop in electric vehicle prices in the world and the need for tax benefits will decrease. The upcoming tax increase in January will only give electric vehicle prices another significant push in the wrong direction.

Published by Globes, Israel business news – en.globes.co.il – on October 31, 2022.

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