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A revolution is brewing over special tax benefits offered to outlying towns and villages. A joint committee of the Tax Authority, treasury and Justice Ministry has suggested that the benefits be offered to 457 communities instead of the current 167, and to establish a permanent mechanism for adding to and cutting the list. The committee also proposes that benefits to high-income brackets be dramatically slashed.

The High Court of Justice ordered the committee be set up in a decision handed down on January 4, 2006 in response to a petition from several communities and individuals. The committee is chaired by the Tax Authority's deputy director general for planning and finance, Boaz Sofer.

The government currently provides about NIS 1 billion worth of tax benefits to 167 small population centers (including seven near the border with Gaza), most located in outlying areas. The substantial tax breaks of 13%-25% can add up to thousands of shekels for a working person The tax benefits are meant to make weaker, outlying settlements more attractive and give them a competitive edge over better-positioned communities. But the committee believes the tax benefits model has a few flaws: There is no clear criteria for inclusion in the list, and it is entirely unclear just how some towns came to be included.

There is no mechanism for updating the list of communities, and once one receives tax benefits, it is is never removed, even if the conditions that qualified the community for inclusion no longer exist.

The benefits are highly regressive: Tax breaks are calculated on the basis of gross salaries, and therefore can only be fully applied to high salaries.

The committee has set a uniform list of qualifications for inclusion in the list of towns and villages meriting tax benefits. According to its recommendations, only permanent settlements in outlying areas qualify if they accumulate a sufficient number of points based on three criteria: socioeconomic status, distance from a large city and distance from a border. The committee recommended that the current benefits budget remain unchanged, and with a dramatically larger number of people benefiting (about double), this will sharply reduce the actual benefits.

High income earners will be the main casualty in the proposal, making the benefits less regressive. The committee says those earning more than NIS 18,000 a month pay taxes, even if they live in Kiryat Shmona. Benefits will be provided in three increments: 7% reduction on gross annual income of up to NIS 103,200, 10% on annual income of up to NIS 118,200 and 12% off annual income up to NIS 180,000.

The committee proposes dropping six towns from the list of those now qualifying for tax breaks: Eilot, Yehiam, Kfar Vradim, Nativ Hashayara, Evron and Shavei Tsion. Communities that have not been eligible for tax benefits to date, but will become so with the implementation of the recommended model are Safed, Katzrin, Kiryat Arba, Rosh Pina, Ramat Magshimim, Afikim, Ashdot Yaakov, Tirat Zvi, Tamra, Yotfata and Ein Gedi.