Gasoline prices have reached record highs. The maximum price for self-service 95-octane gasoline went up over the weekend by 55 agorot, to NIS 8.25 per liter for September.

The sharp rise in gasoline prices is due primarily to skyrocketing crude oil costs, in particular the Brent crude traded in Europe and used in Israel.

Unlike the US, which has more developed oil refining abilities and its own oil and natural gas reserves, the Europeans (and Israel) are more dependent on oil coming out of the Persian Gulf, which has been become inordinately expensive due to the tension with Iran. Brent prices have risen from $78.2 per barrel in October 2007 to $115.7 per barrel at the end of last month.

The cost of oil makes up NIS 3.42 of the price for a liter of gasoline in Israel. But this accounts for less than half the total cost.

Taxes make up a majority of the cost to the consumer. An excise tax accounts for NIS 2.99 of the price and value-added tax, which was increased on September 1 from 16 percent to 17%, makes of the rest. (VAT is charged not only on the basic cost of the fuel but also on the excise tax, resulting in double taxation.) Changes in the shekel/dollar exchange rate also have had an impact on gas prices.

While gasoline prices in the US are about half what they are here, prices in Israel are about the same as in Europe in absolute terms. The average price for a liter of gas in Europe is about 1.8 euros compared to about 1.5 euros in Israel. However, according to a comparative study made by an analyst from Migdal Capital Markets, if one factors in Israel’s relatively low average monthly wage, the relative price for gas in Israel is significantly higher. Gasoline expenses make up about 14.5% of the average Israeli’s salary compared to just 10% of the average European’s.

High-ranking officials in the Finance Ministry have used at least three arguments to justify the high gas tax.

First, fuel combustion generates air pollution that harms human health.

Therefore, the state has the right to “punish” drivers. However, quantifying the damage caused by pollution is no easy matter. How much would people be willing to pay to reduce the risk of adverse health effects cause by carbon emissions? Also, a high gasoline tax carries with it economic costs.

Transportation costs climb, resulting in higher prices for a wide range of goods and products. And there are more effective ways of reducing pollution, for instance by phasing out the use of coal and diesel fuel to generate electricity.

Second, a higher gas price reduces congestion on the roads. But reducing traffic effectively requires a concerted policy that encourages drivers to avoid rush hour peaks.

Higher gas prices will not encourage drivers to arrive earlier or later at work or to use alternative routes. They will hurt drivers who commute from outlying areas where there is no proper public transportation.

Still, the Treasury’s third claim – that high gas taxes are an effective and easy way of increasing state revenue – is undoubtedly true. About 3.7 billion liters of gasoline are sold in Israel every year. Every agora that is cut from the tax per liter translates into a NIS 37 million decrease in revenue.

Even before the one-percentage point hike, VAT revenues from fuel sales were expected to reach NIS 1.63 billion in 2012. And excise taxes were expected to bring in NIS 9.7b.

Together, these taxes account for nearly 5% of the approximately NIS 220b. in annual tax revenues collected by the state. Caving in to populist pressures and cutting taxes on gas might make Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz more popular. But from a fiscal perspective, such a move would be irresponsible.

Unless opposition politicians such as Labor Party chairwoman Shelly Yacimovich and Kadima Party chairman Shaul Mofaz are prepared to either make further cuts to an already downsized state budget or to raise income taxes, they should not be so quick to criticize the government for keeping fuel taxes unchanged.

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