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The Knesset yesterday pushed forward a bill to grant a tax exemption on donations to "encourage settlement" - legislation the opposition says would encourage investments in West Bank settlements.

The bill, which passed its preliminary reading, does not distinguish between communities on either side of the Green Line.

The bill's sponsor, MK Zeev Elkin (Likud ), said during the debate that the tax break would apply mainly to organizations supporting communities in the Negev and the Galilee. The Labor Party sees things differently.

"On the one hand, the bill supports settlement in the Galilee and the Negev as well," said Labor Party chief Shelly Yachimovich. "On the other, Zeev Elkin is the bill's initiator, which raises the suspicion that the whole purpose is to support the settlements."

Labor MK Isaac Herzog added: "In view of the fact that Elkin declined to say publicly that the bill would not relate to the settlements, I decided not to take part in the vote."

Yachimovich and Herzog, who had originally considered supporting the bill, changed their minds due to the harsh criticism from other opposition members. They left the chamber before the vote. The three remaining Labor MKs - Avishay Braverman, Eitan Cabel and Daniel Ben-Simon - voted against the bill.

"If this is the way the leadership acts, maybe we should become an economic arm of Likud and get it over with," a Labor source said. "Don't we have a worldview? After all, this law will justify funding for Judea and Samaria."

Elkin responded harshly to critics of his bill. "Hate has driven you out of your minds, so a person who hates Judea and Samaria will end up choking Deganya and Sde Boker," he said, referring to communities in the Galilee and the Negev.

Elkin said organizations that operate in the Negev and the Galilee had approached him to complain that because they do not deal exclusively with culture, education or sports, the authorities tell them they do not fit the criteria for tax exemptions.

The bill would amend the tax law that defines public causes - not only those that promote religion, education, and sports, but also those promoting "encouragement of settlement." This could include legal assistance and community action, Knesset sources said. The contributions in question receive a tax exemption of 35 percent.

The bill that passed the preliminary reading yesterday originally included the phrase "encouraging Zionist settlement," but the Knesset's legal counsel advised the deletion of the word "Zionist" to prevent discrimination.

Elkin said future versions of the bill would be further refined to speak of settlement according to the government's priorities, so that settlement in Tel Aviv would not be included.

MK Nachman Shai (Kadima ) said that if the bill "trickled into controversial areas outside the large settlement blocs, Kadima would oppose it."

According to Meretz leader Zahava Gal-On, "This Knesset wants to pass laws to prohibit leftist groups from receiving tax exemptions. This an attempt to make the settlements permanent." She added that two-thirds of the groups currently receiving tax exemptions were ultra-Orthodox.