Finance Minister Raises Cigarette Taxes in First Round of Austerity Plan

Israel Tax Authority and Justice Ministry are busy preparing new legislation to crack down on tax cheating, which they hope will increase tax revenues by NIS 2 billion in 2013.

Finance Minister Yuval Steinitz raised taxes on cigarettes and other tobacco products last evening. Smokers will be adding about NIS 1 billion to state tax revenues after Steinitz signed the new regulations on Wednesday. and a packet of cigarettes will cost NIS 2.50 to NIS 3 more. Steinitz also levied a 10% tax on existing cigarette inventories held by businesses.

The cabinet is also expected to approve an increase in taxes at its weekly meeting on Monday. Prime Minister Benjamin Netanyahu and Steinitz will present the cabinet with a proposal to hike taxes already this year, without waiting for the 2013 budget. In addition, the Israel Tax Authority and Justice Ministry are busy preparing new legislation to crack down on tax cheating, which they hope will increase tax revenues by NIS 2 billion in 2013.

Netanyahu said on Wednesday that decisions which would be made at next Monday's cabinet meeting regarding budget cutbacks in 2012 will not affect funding for education and social services.

"At Monday's cabinet meeting, we will introduce real measures to show the whole world that we are going to meet the deficit target," Finance Minister Yuval Steinitz said.

Speaking before the Knesset plenum, which passed the second and third readings of the law to increase the 2013 deficit to three percent of GDP, Steinitz asserted that the "economic and budgetary responsibility of the government and of the Knesset is the sole and principal line of defense of Israel's citizens and its economy. As a result of approving these steps, we won't be seeing mass unemployment like they have in Spain and Greece."

If the cabinet passes the treasury's planned tax increases, tax revenues are expected to increase by some NIS 3 billion by the end of 2012 and by more than NIS 6 billion in 2013.

Earlier in the day, a special meeting was held in the Prime Minister's Office on the budget cutbacks and tax hikes for this year. Netanyahu will be making a decision soon regarding how tax revenues will be raised - either by increasing Value Added Tax from 16 percent to 17 percent, or by raising taxes specifically on alcohol, cigarettes and jet fuel. Finance Ministry officials favor a rise in VAT already this year, which would raise an additional NIS 1.8 billion by the end of the year. The other tax increases would bring in an estimated NIS 1.2 billion this year. These tax hikes do not require legislation, and would most likely take effect on August 1.

During the meeting, Netanyahu said "managing the national economy is like running a household. You have to balance expenses and income. You can't spend money on everything. You must choose. In the past year, we chose to invest in stopping the infiltrators, and to a large degree we succeeded in stopping the wave [of migrant workers] that was inundating the country.

"We decided to spend money on firefighting, including aerial firefighting," said Netanyahu. "We are also dealing with security challenges, in light of the shifting reality. All of which costs money. We cannot spend on these things and on everything else, too."

The prime minister said the decisions that would be made at next Monday's cabinet meeting will not affect the education and welfare budgets. "First of all, we will balance the budget and not deviate from it," he said.

The cabinet will be asked to approve NIS 700 million in budget cuts for 2012 at the Monday meeting. This will be in the form of a five-percent across-the-board cut in all ministries - except for defense, education and social services. This will also bring with it NIS 1.1 billion in cuts for 2013.

"The second thing," said Netanyahu, "is to maintain the overall income framework, because in so doing we ensure that the Israeli economy will not be affected by the global crisis. We will adopt a responsible policy, so that there will not be hundreds of thousands of unemployed."

Steinitz said the measures to be discussed Monday will increase the state's revenues by billions of shekels. Some of these measures will be immediate, while others will be implemented in 2013.

"We will introduce a basic package that sends the message to the whole world - to the ratings firms, to investors, to the international arena - that we mean what we say. We raised the deficit target from 1.5 percent to three percent and we will take every measure to meet this target," he said.

The various tax increases and spending cuts are expected to keep the 2012 budget deficit within the government target of 3.4 percent of gross domestic product, and at three percent of GDP for 2013, said government economists.

The meeting was attended by Harel Locker, director-general of the Prime Minister's Office, Eugene Kandel, head of the National Economic Council in the Prime Minister's Office, and all of the senior treasury officials, including Steinitz, his director-general Doron Cohen, Budgets Division head Gal Hershkowitz and Accountant-General Michal Abadi-Boiangiu.

Even though Netanyahu and Steinitz strongly oppose an income tax surtax on the rich, the issue is still being discussed. Such a "tax on the rich" who earn over NIS 1 million a year would include a 2% surtax on income and is forecast to raise an additional NIS 800 million a year. But this would require passing legislation in the Knesset.

The economic steps to be approved at Monday's cabinet meeting are meant to find a solution for this year's budget deficit first of all, and are only a first step in solving the problem of next year's deficit, said sources in the Prime Minister's Office. This means there will be further economic "decrees" in a few weeks aimed at raising more tax revenues in 2013 and cutting government spending further. Even if the cabinet passes all of Netanyahu and Steinitz's proposals on Monday, there will be the need to increase taxes by another NIS 4 billion to NIS 6 billion next year, and for NIS 13 billion in spending cuts, said the sources.