Taxes on new gasoline SUVs exceed their import price

Taxes on a new gasoline SUV in Iceland can now exceed the vehicle’s import price, according to a review by the Icelandic Chamber of Commerce reported by Morgunblaðið.

The review examines changes to vehicle excise taxes introduced in January, which sharply increased charges on imported petrol cars. Excise tax is calculated on a car’s import price, and value-added tax is then charged on the combined amount.

A gasoline SUV emitting more than 207 grams of carbon dioxide per kilometre now faces a 70% excise tax. Including VAT, total tax reaches 111% of the vehicle’s import price, the review says. The total tax is 74% for a fuel-efficient gasoline car and 61% for a plug-in hybrid, nearly twice the levels before the changes. Electric cars are subject only to VAT, although reduced grants from the Energy Fund pushed up the prices of cheaper electric cars at the start of the year.

The review says the introduction of a kilometre-based charge and the removal of fuel taxes increased running costs for more fuel-efficient cars, making fuel-hungry vehicles relatively cheaper to operate. Higher excise taxes were then applied to newly registered cars with higher carbon emissions. The Chamber says older, less fuel-efficient cars were the only vehicles to benefit from the tax changes.

According to the review, the taxes discourage transactions that would otherwise take place, meaning the government receives no revenue from them and consumers miss out on the benefits. Economists call this deadweight loss. The Chamber says fewer people are buying new cars, which are generally more fuel-efficient and safer than older models.

The review also cites a US study that found the risk of dying in a car crash is nearly twice as high in a car more than 18 years old as in a new car. It argues that slower fleet renewal makes the vehicle fleet more dangerous. The tax burden also falls unevenly across the country, the Chamber says, because electric cars are not a practical option in rural areas.

The Chamber recommends abolishing vehicle excise taxes and applying standard VAT to new cars, as with other goods. It says this would encourage people to buy newer, safer cars and allow consumers to choose a vehicle that suits their needs.