Israeli Treasury Rescinds NIS 3.8 Billion of Tax Hikes, Benefit Cuts

Last-minute reversal comes as Knesset Finance Committee begins voting on Israel's state budget; tax and allocation shuffle will partly compensate for cancelation of unpopular measures.

Moments before the Knesset Finance Committee began voting on Wednesday on provisions in the 2013 and 2014 national budget, the Finance Ministry rescinded some of the legislation's most controversial measures, clearing the way for Knesset approval but saddling the treasury with a funding hole to fill.

The treasury agreed to cancel a plan requiring housewives to make National Insurance Institute and national health insurance payments, as well as a planned 1.5% rise in income tax rate and the imposition of a 3.5% tax on the purchase of a home by current homeowners ("mishaprei diur," literally home upgraders in Hebrew). The Finance Ministry also comprised on a planned cut in child allowances, agreeing to preserve the NIS 140 monthly payment for children born before June 2003.

For businesses in the Israel's geographic periphery, which enjoy tax breaks under the Law for Encouraging Investment, corporate tax rates will rise to 9% instead of 10% as planned.

"The agreements we reached improve the budget," said MK Ofer Shelah, Knesset whip of Finance Minister Yair Lapid's party, Yesh Atid. "The measures we agreed on ease the burden on lower income groups and the middle class while preserving the budget framework and opening the way to economic growth in coming years," Shelah said.

Lapid had faced withering attacks not only from the opposition but from coalition lawmakers as well, over the "decrees" – the package of tax hikes and benefit cuts he proposed for the 2013-14 state budget. Lapid inherited a gaping budget shortfall from the previous government.

The Knesset Finance Committee began voting on the budget and the accompanying Economic Arrangements Bill (hok hahesderim) on Wednesday in a marathon session that was expected to go late into the night. The legislation is set to move to the Knesset plenum for several days of discussion starting Tuesday. The Labor Party alone has submitted some 1,400 objections to the budget.

The changes agreed to on Wednesday will cost the government around NIS 3.8 billion in lost revenue, the treasury said. The biggest loss, about NIS 2.5 billion, will come from scaling back the planned income tax hike and rescinding the tax on "home upgrades."

To make up the shortfall, the Finance Ministry said it planned to cut NIS 1 billion from ministry operating budgets and was taking back some NIS 500 million in spending increases for both the education and transportation ministries. The treasury added that it hopes to close some of the gap with an extra NIS 500 million in dividends from government-owned companies.

Some of the lost revenue will come from taxpayers. While the 1.5% income tax rise was canceled, it was replaced by a graduate scale of tax hikes – by 1% on salaries up to NIS 14,000 a month, by 1.5% on monthly salaries between NIS 14,000 and NIS 22,000, and by 2% on monthly salaries exceeding NIS 22,000. Companies that enjoy tax breaks under the investment law will pay corporate tax of 16% rather than 15% as planned. The current rate is 12%.

In related news, the Knesset Labor, Welfare and Health Committee removed from the Economic Arrangements Bill a plan to end tax benefits on pension payments for people earning more than NIS 15,000 a month, a move that will reduce government revenues by NIS 1.2 billion.

The change will be put into separate legislation, to be debated at some later. That means no decision will be made on it for many months and perhaps it will never be approved.

While coalition members praised the treasury's decision to scale back tax hikes and benefit cuts, opposition lawmakers were quick to play up the extra burden that taxpayers have to pay in exchange.

"Lapid has backtracked on some of the looniest ideas that treasury officials had sold him," said MK Stav Shaffir (Labor). "Nevertheless, the measures that are expected to be approved don’t reflect any fundamental change in priorities .… The budget is one that favors in every way those with money and connections over the working man."

MK Gila Gamliel (Likud), who had opposed many of the "decrees," lauded the changes as a personal victory over treasury officials. "More than being happy that my views were accepted, I am happy that they accepted the opinion of the Israeli public, which holds that decrees intolerable to the public cannot be approved."

The real estate sector greeted the decision to rescind the planned "home upgrade" with unalloyed praise. Figures in the sector had said the tax would increase home costs by an average of NIS 51,000 and noted that despite its name it would apply to home downsizers as well.

"It was the right decision, that will help people moving up to a better home to exercise their basic right to a larger home as their families grow," said Avner Levy, chairman of the Contractors and Builders Association of Tel Aviv-Jaffa. "It’s an important and positive step for the middle class, who works from morning to night to achieve their goal."

In another last minute move, Lapid on Wednesday approved a proposal to give tax credits for auto safety systems. The reform, which takes affect August 1, will give auto importers a credit of up to NIS 2,250. The size of the credit will be based based on a scale of 0-10, depending on its features of the system.

Nimrod Bousso and Daniel Schmil contributed to this report.

Michal Fattal