Private transportation in Israel: An analysis of developments in the past two decades

       An excerpt from Selected Research and Policy Analysis Notes to be published soon:​


  • Policy measures regarding travel by private vehicle in Israel—including the decision to reduce taxes on the purchase of new cars beginning in 2005 and the decision to increase the tax on variable expenses only slightly, compared with the increase in household income—contributed directly to increased road congestion. These steps joined other economic processes that were acting toward rapid growth in private-vehicle kilometers travel in Israel.
  • Empirical experience indicates that the efficiency of a road (in terms of travel speed on it or in terms of the number of cars that pass through a given point on it in a specific period of time) markedly declines when traffic on it rises above a certain threshold. To avoid reaching this threshold, to the extent possible, existing policy has to be adjusted. This can be done by policy that combines incentives to slow the pace of growth in private-vehicle kilometers traveled—such as increasing investment in improving public transportation and increasing taxes on private-vehicle kilometers traveled (particularly during peak times)—and aligning investment in roads to the growth rate of demand.

 

Research conducted by Dr. Yoav Friedmann of the Bank of Israel’s Research Department and that will be published soon in the Bank’s “Selected Research and Policy Analysis Notes” describes the policy adopted in Israel in the area of private transportation, particularly the taxation of the vehicle and the taxation of vehicle kilometers traveled (VKT), and analyzes its ramifications on the extent of travel in private vehicles over the past two decades. The main conclusion drawn in the paper is that the increase in road congestion is not a fait accompli and that a policy to reduce the growth of private vehicle use is required. Such a policy should combine incentives to slow the pace of growth in private VKT—raising the cost of travel in a private vehicle, mainly during peak times, and reducing the cost (mainly in terms of time) of travel via public transportation (such as improved frequency, accessibility, and coordination among its various components)—and aligning the growth rate in supply of road infrastructure with the growth rate of demand. Without a change in the policy, the increased road congestion is expected to adversely impact road efficiency, as empirical evidence shows that efficiency of the road (in terms of travel speed on it or in terms of the number of cars that pass through a given point on it in a specific period of time) markedly declines when traffic on it rises above a certain threshold.

 

The research presents a detailed analysis of the developments in the past two decades of most of the fixed components in the cost of car travel, and the analysis indicates that the cost of private vehicle travel declined sharply in the past decade. The decline derives mainly from the cost of purchasing a vehicle having decreased in the past decade, a process led by a reduction in purchase tax, the real appreciation of the shekel, and the decline in the real interest rate (which determines the cost of capital used in purchasing a car). In particular, the government reduced taxes on the purchase of a new car, and today the average purchase tax on a new private car is approximately 60 percent; in the first half of the previous decade it was more than 80 percent. In parallel, the government increased taxes on variable expenses (mainly excise tax on fuel) only moderately, by less than the increase in household income. The overall change in taxation increased the demand for cars.

 

The entry of hybrid and electric cars is expected to lead to a further decline in the cost per kilometer traveled and to continued encouragement of private-vehicle travel. According to the US Environmental Protection Agency, hybrid cars’ improvement in fuel consumption can reach 30 percent or more, and based on (unaudited) road tests it is 20–35 percent. The entry of such cars into the market is rapid—in the first half of 2018 hybrid cars’ share in new passenger vehicles was more than 15 percent, in contrast with only 4 percent in 2016—and therefore it is critical to change the policy, meaning to increase the cost of travel in private vehicles and to improve the public transportation infrastructure with the goal of encouraging a reduction in private vehicle use.

 

Beyond the impact of tax policy and reduction of imported vehicle prices, road congestion increased in the past decades due to economic processes as well. These include the increase in the standard of living and the expansion of employment in parallel with the dispersion of the population. The increase in the standard of living contributes to growth in road congestion by increasing the motorization rate (the number of private vehicles per 1,000 inhabitants), in addition to the increase in congestion caused by the rapid population growth. The motorization rate in Israel increased by more than 50 percent in the past two decades, from approximately 210 vehicles per 1,000 inhabitants in 1998 to 320 vehicles per 1,000 inhabitants in 2017. The annual private VKT per capita (total distance traveled in a year, in kilometers, divided by the population) increased similarly in the same period, by approximately 45 percent. The expansion of employment in parallel with the dispersion of the population also contributes to road congestion, through increased commuting (fixed intercity travel from the home to work). While two decades ago 45 percent of employees in Israel commuted, today approximately 55 percent do.

 

Despite the growth in demand for private-vehicle travel, and the contribution of policy to that, the investment in road infrastructure as a share of GDP remained stable over the course of the past two decades, at a level insufficient to ensure that the road congestion will not increase or at least will not cross the threshold at which road efficiency declines markedly. The ratio of the level of private VKT to total road area in Israel has increased by 35 percent since 2005.