Israel's Treasury Weighs Changes to Budget to Remove Most Contentious Elements

Officials are also discussing imposing an estate tax, although not in current fiscal package.

Meirav Arlosoroff
Meirav Arlosoroff
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Meirav Arlosoroff
Meirav Arlosoroff

With its budget under attack by the media, economists and cabinet members alike, Israel's Finance Ministry is preparing a contingency plan that would remove certain controversial measures included in the current proposal.

Officials said Sunday that it is unlikely all the measures contained in the 2013-14 budget and Economics Arrangements Law will be passed by the cabinet, and that the public outcry may induce Finance Minister Yair Lapid to back down from some of the proposals.

One measure already under discussion at the treasury is to reduce the proposed purchase tax on single homes to 1.75%. Under the current plan, a 3.5% tax would be imposed on the full value of a home for home owners trading up for a larger house. The new tax was criticized as making it much harder for young couples to buy a home together if one of them already owns even a small studio apartment.

There are ideas to remove other controversial parts of the budget, but officials say they will have to be replaced by different measures to raise revenues or cut spending. The treasury has no intention of breaching the budgetary framework or the deficit target, which has already been raised to 4.65% of gross domestic product from an original goal of 3%, they say. Therefore Finance Ministry officials are preparing several measures that had been considered during budget deliberations but eventually rejected.

One such measure likely to be reexamined is revoking the value-added tax exemption on fresh fruits and vegetables, which would bring in estimated revenues of about NIS 2.4 billion to the government. Imposing VAT on fresh produce is unlikely to hurt consumers, treasury officials reason, because the cost differential between fresh and other produce is kept by the retailers.

In addition, the exemption on advanced-training funds (kranot hishtalmut ) might be reduced instead of eliminated, officials say. The idea is to end only the exemption on the capital gains portion, a change worth an estimated NIS 1 billion a year in tax revenues. The advantage of this would be that it doesn't change the cost to employers paying into the fund and therefore wouldn't involve labor relation issues or the consent of the Histadrut labor federation.

Another exemption the treasury is reconsidering, at the recommendation of Bank of Israel Governor Stanley Fischer, is on income from home rentals. The treasury is weighing canceling the exemption and imposing a 10% tax on all such income from the very first shekel, which could generate at least NIS 1 billion in revenues.

Up to NIS 5,000 a month in rental income is currently tax exempt. Beyond this amount, only a partial tax is imposed, either at the full marginal rate after deducting expenses or at a 10% rate on all rental income exceeding NIS 5,000. But due to the exemption, many landlords don't pay any tax even when their rental income exceeds NIS 5,000.

However, the treasury is worried that because it's a seller's market, home owners won't hesitate to pass on the cost of the tax to their tenants, setting off a short-term jump in rental prices.

Although it is not part of the deliberations about the 2013-14 budget, officials are also weighing a modest inheritance tax, which a preliminary analysis showed could raise NIS 1 billion to NIS 2 billion annually. The plan is to impose a 10% rate on all estates worth more than NIS 10 million per heir.

The treasury has traditionally been opposed to an inheritance tax. An estate tax was on the books until the early 1980s but produced very little revenue and was difficult to enforce. Furthermore, officials regard it as a form of double taxation since the deceased had already paid income or capital gains tax on the money. They are also concerned that an estate tax would encourage wealthy Israelis to put their money in overseas tax havens.

However some officials assert that a small tax on estate would have a positive effect by reallocating assets across generations, ensuring that wealth doesn't become concentrated. Many countries in the West, including the United States, impose an estate tax.

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