Why Do Israelis Pay Such Inflated Municipal Taxes?

Outdated calculation methods have Israelis paying tax as though they live in palaces. Now the residents of 20 cities are organizing a protest.

Apartment buildings under construction in Netanya (archives).Credit: Ofer Vaknin

The neighborhood of Ganim in Ganei Hatikva in the Ono Valley looks like the ideal place for young couples with small children. This community neighborhood, quiet and green, whose construction began in 2006, features modern towers surrounding a park with playgrounds and wide paths for walking and cycling, and a country club at its center.

In the last two weeks, the pastoral view has featured something else: about 200 big signs hanging on several of the buildings, marking a quiet protest by homeowners in the neighborhood. The signs, which are identical in look, state the size of the apartment and the bimonthly municipal tax, or arnona, bill – “1,700 shekels arnona for a 5-room apartment.” The signs are part of a protest being organized by neighborhood homeowners against the high city taxes they are charged, including because of an outdated method of calculation. Some 200 more signs will be hung in the coming weeks, turning the whole neighborhood into one big live protest.

The protest built slowly, says Carmela Sina, a resident. “The neighborhood, which is still under construction, was gradually occupied. The more people moved in, the more we began to talk together and we realized we were paying insane arnona rates. I hadn’t noticed before. I accepted the amount I was charged – 1,800 shekels for two months for a 5-room apartment. Then I checked the arnona bill and discovered I was being taxed on an area of 229 square meters, but the area of my apartment is 138 square meters. I was effectively paying tax for another whole small apartment.”

The many and myriad arnona calculation methods, which differ from one local government to another, were set almost 50 years ago. The most onerous method is called gross-gross: The tax calculation includes the area of interior walls, exterior walls, the stairwell, the building lobby and any other built-up public area. The opposite method to gross-gross is called net-net. This measures the area of the property’s floor space without the external walls, interior walls and shared spaces. Every local authority sets its arnona rates based on a scale of minimum and maximum, set by the Interior Ministry.

In Ganei Hatikva, the residents discovered, the calculation is gross-gross, effectively adding to the calculation a share of public spaces, including storage space, air conditioning rooms, electricity rooms and so on. This is the reason for the wide discrepancy between the area of the apartment and the area calculated for the purposes of arnona in Sina’s case and in additional cases in the neighborhood, such as that of Eran and his wife, parents of a 2-year-old girl.

After borrowing and with some parental help, the young couple bought a 120-square-meter apartment and did their math carefully, but were unprepared for the 1,500-shekel arnona bill for two months. “I bought a four-room apartment and discover I’m paying city tax like in luxury towers, and three times as much as I had been paying in Tel Aviv,” says Eran. “All the money I thought I’d save by moving out of Tel Aviv is going on arnona that’s 1,000 shekels more than I had been paying in Tel Aviv for an apartment that was only slightly smaller.”

For their 120-square-meter apartment, they’re paying tax based on an area of 197 square meters.

The residents contacted council chairwoman Lizy Delaricha, demanding that the rates be reset more sensibly. She replied that the Interior Ministry does not allow her to change the calculation method, and there is nothing she can do about it. Following that, the residents began their silent protest, hoping to create a public noise that will compel the municipality to do something.

New neighborhood, high costs

One of the main reasons for the high arnona rates goes much deeper than Ganei Hatikva’s problem. “These cases aren’t unusual. They’re in almost all of Israel, mainly in new neighborhoods. It’s because of a historic calculation method that does not suit the reality of today’s real estate,” says Dr. Henryk Rostowicz, an expert on municipal tax law. “In 1968 it was decided that each local authority could enact an arnona order using this or that calculation method. Until 1986, the local authorities could change their measurement methods, but then the law was amended and prohibited the authorities to change their method of calculation, for better or worse. In practice, neither the interior minister nor the finance minister have the authority to approve a change in the measurement method. The result is that the system each local authority set for itself decades ago cannot be changed.”

Back in the 1960s, when the calculations were set, there were relatively fewer public spaces in building projects and the difference between the actual apartment area and the area for tax purposes was not great. That is not the case any more. The problem is keen in new neighborhoods built in the last 20 years, featuring tall towers that require a lot of service rooms to maintain them, which wind up in the gross-gross arnona calculation.

Also, as housing prices rose and with it the quality of building, many modern towers feature big lobbies, a lot of parking space, air conditioner rooms, storage space and more. All these add to the gross-gross arnona calculations.

In fact, residents in 20 neighborhoods are organizing a protest along the lines of the Ganei Hatikva example. And if anything, the Ganei Hatikva movement was preceded by one in Hod Hasharon.

“I lived in a 4-room apartment in Hod Hasharon and paid 800 shekels arnona every two months,” says Moti Liter. “I decided to buy a bigger apartment with 5.5 rooms in the new ‘1200’ project, and to my astonishment discovered that my arnona had jumped to 2,100 shekels.”

Efforts to inquire on what the calculation was based were stymied by municipality squirming, claiming there was a lawsuit in the works. Finally Liter did get the city’s response to the class action motion against it and discovered that because of a mistake, the city of Hod Hasharon had not charged for public spaces in the city since 2010, so it decided to correct the mistake. But instead of charging all homeowners in the city, it decided to only charge the new neighborhoods, which have a lot of public space, and to include everything possible in the calculation.

“The city began to charge taxpayers owning apartments in high-rises for common areas (beyond their share of the stairwell) only from 2010, which had erroneously not been done by his predecessor,” the statement of defense states.

So arnona on new apartments went up by 30 to 40 percent compared with old apartments, for no obvious reason, says Liter. After the city refused to discuss the issue, a public protest began to organize in April, then suspended activities during Operation Protective Edge.

“We decided to warn people looking to buy new apartments in projects in the area about the high arnona and managed to slow sales. We won’t stop,” Liter says. “I don’t live in the storage room or the electricity room, so why should I pay tax for them? Who needs it? I pay higher rates than owners of villas do.”

Hod Hasharon was not entitled to impose new charges even if permitted by its calculation method, says Yaron Nadam, a partner in the Ben-Eliezer law firm which specializes in municipal tax law, citing precedent in the case of Yavneh, which the court refused to allow to start charging single-family houses for cellar space. Its calculation method would have permitted it but the city hadn’t charged it before and couldn’t start now, the court ruled.

Change of practice is tantamount to change of calculation method, the court ruled, which was prohibited.

Residents in new neighborhoods in Rosh Ha’ayin have the same problem. “I bought a 120-meter apartment in the neighborhood of Mishkenot Hamusika,” says Ilan Shtiwi, who’s organizing the local protest. “Until the end of 2013, the arnona was reasonable and based more or less on the area of the apartment. In January 2014 we got a notice from the city, as did all the residents of the neighborhood and other new neighborhoods, that it had revised its measurement of the area for arnona calculation purposes and added all the common areas, including trash rooms, electricity rooms, storage rooms and more. The area I was taxed on grew by 40 square meters and the arnona bill jumped from 800 shekels every two months to 1,200.”

The city explained that was the outcome of the gross-gross calculation method. The protest began.

And in Beit Shemesh too, and in Acre, Hadera, Modi’in and many more locales. “I live in a 100-square-meter apartment and get charged arnona on 170 meters,” says Itai Binyamin of Modi’in.

The problem, says Rostowicz, isn’t limited to residences. There are even sillier cases, he says, of commercial areas where the common area is bigger than the private areas. The answer lies in a compromise measurement, such as methods that factor in interior and exterior walls but not the common areas.

The government set up a committee to study arnona, headed by accountant Uzi Barzilai, but its recommendations remained just that, Rostowicz says. What Nadam thinks is that the Interior Ministry should lay down clear, uniform rules for calculating arnona, and institute them gradually.