Economists Urge MKs to Reject Law Exempting Home Buyers From VAT

Academics, former officials say bill won’t reduce prices or demand and will cut tax revenues by up to $876 million a year.

Ofer Vaknin

Less than a week before the Knesset is due to take the first of three votes on Finance Minister Yair Lapid’s bill to exempt many new-home purchases from the value-added tax, a group of 14 leading Israeli economists and former top economic officials forcefully attacked the plan on yesterday.

In a letter to the Knesset Finance Committee, the group urged lawmakers to reject the zero-VAT plan, which Lapid says will help to rein in soaring housing prices.

The letter was signed by many of the leading lights of economic policy in Israel, including Zvi Eckstein, a former deputy Bank of Israel governor; Avi Ben-Bassat, a former treasury director general and Dan Ben-David, an influential economics professor based at Tel Aviv University.

“The real estate market has suffered for years from rapidly rising prices, which reflects a marked upsurge in demand for homes together with inelastic supply,” the letter said. “The zero-VAT proposal is bad and does nothing to reduce the excess demand in the property market and will even likely exacerbate the problem of home prices.”

Lapid initiated the plan over the objections of many in the Finance Ministry as he and other cabinet ministers wrestle with the problem of unaffordable homes. Prices have risen about 8% in the past year, creating a political headache for the government and putting home ownership out of the hands of many middle-class Israelis.

The VAT exemption would apply to young couples buying new homes below a top price of 1.6 million shekels ($470,000), if at least one member of the couple has done military or civilian national service. With VAT currently at 18%, the exemption would yield big savings.

The VAT exemption has been controversial since it was first leaked to the public in the spring. Economists said it wouldn’t lead to lower prices, while others objected to its two-tiered nature: For people who have not done military or civilian service — including most Israeli Arabs and ultra-Orthodox Jews — the maximum home price eligible for the benefit would be 600,000 shekels, including the 18% VAT.

Lapid responded to critics by saying the bill was designed for middle-class families, not economists.

The finance committee is due to get the legislation for deliberations next Wednesday. Its chairman, Nissan Slomiansky (Habayit Hayehudi), hopes to complete the debate and bring the bill to the Knesset floor for the final two votes needed to make it law within three weeks.

The Lapid proposal would increase risk for the economy by causing more and more people to buy homes financed in partly by lending from the financial sector, the letter said. It would also cost the government 2 billion to 3 billion shekels annually in lost tax revenues.

Others to sign the latter included Momi Dahan, who heads the Federmann School of Public Policy and Government at The Hebrew University, and Reuben Gronau, who sits on the Bank of Israel’s monetary committee.

Dahan, who organized the protest, said he had no trouble recruiting signatories from across the economic spectrum. “The idea was cooked up a few weeks ago. I spoke at the Israel Economic Association against the law recently. I said there was no economic or social logic to it and its cost to the budget was high,” he said. “I asked what we can do to stop it. The response was impressive.”

Slomiansky declined to comment on the letter, but other Knesset members said they weren’t moved to change sides by the protest.

“I recognize the claims made by the professors. I suggest that everyone look at the situation comprehensively … both from the supply and the demand sides of the housing market. On the supply side, the planning and licensing process has been reformed, as have umbrella agreements with local authorities and the plan for rental housing,” said MK Boaz Toporovsky from Lapid’s Yesh Atid party.