An Unexpected Winner in Israel's Defense Budget: Poorer Communities

Under agreement between Finance Minister Moshe Kahlon and Defense Minister Moshe Ya’alon, army bases’ municipal taxes to be redistributed from a central fund.

Alon Ron

The recently signed agreement on the defense budget will radically alter the way the Defense Ministry pays municipal taxes, to the benefit of poorer communities and the detriment of wealthier ones.

Under the agreement, reached by Finance Minister Moshe Kahlon and Defense Minister Moshe Ya’alon, the ministry will no longer pay municipal tax directly to the local authorities where its facilities, mainly army bases, are located. Instead, all the payments will go into a central fund that is slated to be established.

The fund will then share these revenues among various municipalities in a differential manner, with poorer localities getting more money. The revenues in question amount to some 500 million shekels ($130 million) a year. Establishing such a fund was one of Kahlon’s campaign promises.

Since the fund does not yet exist, it is not yet clear what its criteria for allocating the money will be. It’s also not clear how much influence the finance minister will have over its decisions.

Ultimately, this fund is slated to receive the municipal taxes paid by all government offices, agencies and corporations, ranging from other ministries to the Israel Electric Corporation. That would double its revenues, to about a billion shekels a year.

One of the fund’s goals is to end the severe discrimination faced by Arab towns, which contain 15 percent of Israel’s population but receive only two percent of the government’s municipal tax payments.

The treasury has tried repeatedly to establish such a fund in the past, but has been thwarted by opposition from local authorities that benefit from the current arrangement. The agreement with the Defense Ministry, however, is an important step forward, since that ministry accounts for about half of all the government’s municipal tax payments.

About 65 percent of the ministry’s municipal tax payments already go to localities on the bottom half of the socioeconomic scale, with the biggest beneficiary in this category being Be’er Sheva (51 million shekels in 2013). But almost none of the payments go to the very poorest communities, which are the Arab towns. Only two Arab communities (Peki’in and Ghajar) collect any taxes from the ministry, and they get very little.

Moreover, many towns located in the top third of the socioeconomic scale collect sizable annual tax payments from the ministry. These include Tel Aviv (34 million shekels in 2013), the Jezreel Valley (20 million), Ramat Hasharon (16 million), Givat Brenner (16 million), Haifa (15 million) and Rishon Letzion (10 million). All these towns will likely be hurt by the new arrangement.

The Kahlon-Ya’alon agreement says the Defense Ministry will give the fund 500 million shekels a year. It isn’t clear whether this is a fixed sum, or whether it will vary according to the actual size of the ministry’s municipal tax bill.

But some tax revenues would have been transferred from wealthy communities in the center of the country to poorer communities down south even without this agreement, due to existing ministry plans that call for moving army bases from Ramat Hasharon, Kiryat Ono and Rishon Letzion to the Negev.