Finance Ministry Plans to Force Local Authorities to Share Tax Revenue

The treasury also plans to renew a drive launched several months ago for transferring education and welfare budgets from more affluent localities to poorer ones.

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The Finance Ministry is planning to put into law a new mechanism mandating how revenues are shared between local governments.

Under the proposed law, many wealthier local authorities, primarily the rural regional councils, would be forced to relinquish part of their income from municipal taxes. The treasury also plans to renew a drive launched several months ago for transferring education and welfare budgets from more affluent localities to poorer ones.

The changes would be contained in an amendment to the Municipalities Ordinance via the Economics Arrangements Law that would take revenue allocation out of the hands of the interior minister.

The move stems from the clamor raised by heads of municipalities in peripheral regions, led by the Negev towns of Dimona and Yeruham, over the fact that they do not share in the tax revenues from businesses based in nearby rural councils.

Yeruham, for example, has almost twice the population of the neighboring Ramat Negev Regional Council, which nonetheless enjoys almost four times the tax income just from the army bases already located there. Yeruham recently petitioned the High Court for jurisdiction over the immense training base being built on its outskirts.

Battles between cities in the periphery and nearby regional councils over the allocation of property taxes have gone on for decades without resolution. The Interior Ministry has the power to impose revenue sharing but has never exercised it.

The expected 2013 budget cuts won’t allow the treasury to increase its equalization grants beyond the current NIS 2.4 billion, even though poorer municipalities are entitled to almost NIS 3 billion according to the formula used. This, plus the growing distress of the development towns, pushed the ministry into considering making the better-off localities subsidize their poorer neighbors.

The treasury is expected to propose two steps with the Arrangements Law. The first would force income sharing on adjacent local authorities by means of a legislated mechanism, without the Interior Ministry having any right of appeal. The only detail of the mechanism known so far is that the locality on the receiving end would need to meet a minimum threshold for collecting.

The second step would involve transferring funds from the 50 financially strongest localities to the 50 weakest by adjusting the central government’s contribution to their education and welfare budgets. This would entail a change to the formula determining the participation by the localities in the education and welfare budgets allocated by the state.

Local authorities are currently required to provide 25% of this spending. The proposed change would require wealthier localities to supply between 50% and 75% of the allocations, while poorer ones would cover just 8% to 12%. All in all, this would effectively transfer about NIS 1.2 billion in spending from wealthier to poorer authorities.

Interior Ministry officials said in response that it vehemently opposes forced revenue sharing because criteria can’t be determined by law. Each dispute between two localities over revenues is different, it claims, and requires a unique solution. The only reason the treasury is initiating the move, according to the officials, is to relieve itself from pressure to increase equalization grants.

Interior Ministry officials conceded that they have failed until now in redistributing revenues between local authorities, but that the ministry is now designing a comprehensive action plan on the subject. One of its intended initiatives is to encourage cooperation between localities, a move being promoted in conjunction with the Finance Ministry.

The Interior Ministry also says it plans to push harder for mandatory income sharing because “today’s reality is intolerable, and doesn’t permit municipalities in the periphery to develop. There will be a need to start transferring income and territory from the regional councils to the adjoining cities.”

But this would only be done after a careful assessment and certainty that transferring income would really improve conditions for the recipient. The Interior Ministry also plans a comprehensive survey of all surface area in the State of Israel and allocate all open areas that aren’t yet under the jurisdiction of any local authority.

Dead Sea WorksCredit: Ofer Vaknin
Dimona’s train station. Credit: Ofer Vaknin

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