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The Knesset Finance Committee yesterday voted to scrap the planned 40-agorot increase in fuel excise tax that was to take effect in January, but in turn delayed a reduction in income tax for higher earners by a year. Those earning at least NIS 21,240 a month were to have had their income tax lowered next year.

The committee's steps, which also included delaying the reduction of corporate tax to 23% from 24%, stemmed from an agreement among committee chairman Moshe Gafni, Finance Ministry budget chief Udi Nissan and Tax Authority director Yehuda Nasardishi.

The 40-agorot increase in excise tax on fuel was due to generate about NIS 1.5 billion annually for the state, but the delay in cutting income and corporate tax is expected to save the state about the same amount.

Indirect taxes in Israel are very high compared to other countries and will keep rising if current policies continue, Gafni said.

"On the other hand, regarding direct taxes, we are in the lower half in the OECD, and the direct tax rate should be going down," he added.

Israel is on a course that is insensitive to social needs "and we have to change that," Gafni said.

Frida Israeli, who heads the state tax revenue department at the Finance Ministry, said Israel has the fifth highest indirect tax rates in the OECD - the Organization for Economic Cooperation and Development.

"I understand the economic logic that tax reductions encourage the building of manufacturing facilities, but I have a feeling that we have gone too far with the process because it's causing suffering to the population," Gafni said. He said fuel prices are "crazy" and high fuel costs hurt not only car owners but also increase the cost of food and other basic necessities.

According to MK Miri Regev (Likud ), "The Finance Committee doesn't have to adopt the Finance Ministry's whims regarding everything related to fuel." She took the Ministerial Committee for Legislation to task for its opposition to a bill Regev proposed that would give the Finance Committee oversight authority on gasoline prices.

But she praised Gafni for his committee's decision to link the freeze on lower income tax to the reduction in fuel taxes. "We have to lower excise taxes and fuel prices in general because every citizen who fills his tank every day curses our government," Regev said at the hearing on the matter.

Also yesterday, the Finance Committee allotted another NIS 800 million to the fire service and home front civil defense, and NIS 300 million to enable reductions in public transportation fares. The allocations will be funded by an across-the-board 1.5% cut in the state budget for this year and next. The education budget, however, will be cut by 0.25% this year and 0.75% in 2012.