Israeli Government Torn Over Outmoded Tax Break Policy Aimed at Immigrant Communities

Interior Ministry wants to abolish the old system and establish a fund that will distribute the government's municipal tax payments in a more egalitarian way that will benefit poorer cities.

New immigrants from France studying at a Hebrew ulpan in Netanya, in 2015.
Lior Mizrahi/Getty Images

The argument between the interior and finance ministries over an outmoded and unequal policy of government payment of taxes has escalated in recent weeks.

For decades, the state has paid full municipal taxes (arnona) on its properties in cities where large numbers of immigrants reside, but pays reduced taxes in locales without large immigrant communities.

The Interior Ministry wants to abolish the old system and establish a fund that will distribute the government's municipal tax payments in a more egalitarian way that will benefit poorer cities.

The Finance Ministry has proposed a different scheme, whereby the state will stop paying full taxes in certain locales, as per the existing policy, and redirect the resulting extra funds to the Federation of Local Authorities in Israel. The latter would then allocate the money according to egalitarian criteria that take into consideration local socioeconomic, demographic and other conditions.

In the meantime, the municipality of Netanya – a quarter of whose residents are immigrants – has decided not to wait until the two ministries sort out their disagreement. It announced a few days ago that it would stop providing special services to the community beginning next month, and is dismissing all 55 employees in the city's immigrant absorption department.

A protest march was due to start Tuesday from the Negev city of Yeruham to Jerusalem, demanding more equal funding.

“We can’t agree to a situation in which schoolchildren in wealthier communities receive 10 times the funding that schoolchildren receive in weaker communities,” the organizers of the march, among whom is Mayor Michael Biton of the southern city of Yeruham.

Immigrant Absorption Ministry figures obtained by Haaretz reveal that only two out of 10 cities to which a large number of immigrants moved in 2015 – Be'er Sheva and Ashkelon, each of which took in 900 immigrants – are on the list of what are called "immigrant cities." Meanwhile, the well-heeled central Israel city of Ramat Hasharon took in only 56 immigrants, but received 15 million shekels (approximately $3.89 million) because the government still pays 100 percent of municipal taxes there.

The High Court of Justice has heard a number of petitions on this issue in recent years, the most recent of which was submitted by the Netanya Municipality.

Interior Ministry director general Orna Hozman Bechor, informed the court recently that the ministry’s position is “to cancel the partial exemption given to the state in the payment of municipal taxes (in certain cities) so as to apply the law equally to the state.”

Hozman Bechor said that the existing arrangement with the state paying full municipal taxes in the so-called immigrant cities would be abolished.

The Interior Ministry said some of the funds resulting from abolishment of the old system should “be transferred by the local authorities to a fund to close [the differential economic] gaps in local governments.”

“There is no connection today between locales defined as ‘immigrant cities’ and the number of immigrants in them,” Interior Minister Arye Dery told Haaretz, stressing that there must be a more egalitarian, updated plan to distribute funds. Cities benefiting from more income because the state pays full municipal taxes on its properties there – regardless of the number of new immigrant residents – should transfer the extra income to cities that “are in financial trouble due to historic distortions,” Dery said.

The two ministries' schemes for dealing with the situation come with two different price tags: The treasury plan would cost between 270 million and 300 million shekels (about $70 million to $77 million), whereas the Interior Ministry proposal would cost about half-a-billion shekels.

One treasury official said: “No interior minister has agreed to a policy of redirecting the monies to a fund. The 500 million shekels the Interior Ministry wants to get will have to be taken away from budgets covering other, equally important needs.”

According to MK Yossi Yonah (Zionist Union), who proposed a private member’s bill on the matter, there is agreement across the political spectrum that the current policy is outdated and distorted, and must be changed to accommodate two principles: The state should pay 100 percent of its municipal taxes everywhere and a fund should be established to redistribute money to poorer municipalities.

For its part, the Netanya Municipality said in a statement that it spends about 40 million shekels a year on immigrant absorption, and that out of its 230,000 residents, some 60,000 are immigrants who have arrived in Israel since 1990.

“The residents of Netanya pay for immigrant absorption, which is a national task, not a municipal one,” Netanya Mayor Miriam Feirberg-Ikar wrote Prime Minister Benjamin Netanyahu.