How Nesher Was Spared More Tax

And why you should deeply care about the clout big business has in Knesset.

The Trajtenberg Report devoted almost two pages to a Knesset Finance Committee discussion in December 2010. The discussion was about raising excise tax on fuel, including kerosene and diesel oil, by 20 agorot per liter in 2011 and another 20 agorot next year. It may not sound like much but the increase would have brought the treasury a billion shekels in tax revenue each year. Car owners were supposed to bear the brunt.

Yet although the proposition would have substantially increased indirect tax, not a single representative of the public was present at the discussion.

Nesher - Tal Cohen
Tal Cohen

But interest groups were well represented, including the Manufacturers Association, the Council of Transporters, the organization of gas station owners, the Israel Electric Corporation, the taxi drivers organization - and Nesher Israel Cement Enterprises.

Nesher's people, it turns out, were there for good reason.

While about raising excise tax, the government decided to raise it on petcoke as well.

You've never heard of petroleum coke? That may be because only one company in Israel uses this refining product. Nesher is a cement-manufacturing monopoly owned by the IDB Holding Corporation. Raising the excise tax on petcoke was supposed to yield an additional NIS 22 million annually - a sum that in the estimate of the Trajtenberg Committee, which was charged with discussing Israel's high cost of living, is negligible compared with Nesher's annual sales.

The Knesset Finance Committee therefore waxed skeptical of Nesher CEO's moaning during the Knesset discussion, to the effect that the tax increase would be a serious blow to Nesher.

It's not surprising to discover that the Manufacturers Association also supported Nesher. "The Manufacturers Association is opposed to the increase in excise tax on petcoke, which will undermine the cement industry's competitive edge," said a representative of the association at the discussion.

Odd, that. The Trajtenberg Committee found Israel's cement industry totally devoid of competition. Nesher is a declared monopoly that sells 90% of the cement in Israel (by volume) and does not export it (except to the Palestinian Authority).

Yet the arguments in Nesher's favor worked. The Finance Committee approved the increase in excise tax on all types of fuel, except petcoke.

"The committee believes," wrote the Trajtenberg Committee, "that the various decision makers have difficulty confronting organized bodies and pressure groups. This difficulty occasionally creates a bias in decisions in favor of the latter over the public interest."

The public is amorphous and undefined, wrote the committee; it cannot always bring its opinion to the regulator. "But supervised bodies are very familiar with the regulation and the regulator. The committee believes that the representation of the ordinary citizen and his interests is deficient when confronting the pressure groups from the various sectors. In the end this allows the transfer of wealth from the public to a small group of interested parties."

Fair thee well

Although the Trajtenberg Committee was established because of the summer's social protest, for Prof. Manuel Trajtenberg these things are nothing new. In effect, Trajtenberg preceded his own report by three years. As chairman of the National Economic Council he published recommendations on Israel's budgeting process. There he also addressed the difficulties of governing in Israel.

"Some reforms," he wrote three years ago, "may be of clear benefit to the public, but will be extremely difficult to pass in the ordinary legislative process."

It isn't an Israeli disease. The National Economic Council cited studies conducted abroad proving that reforms somewhat beneficial to the entire public but horrible for a small group of interested parties are very difficult to legislate. The public can't go to parliament to support reforms. It doesn't pay for them to fight. But it does pay interest groups to fight in parliament. Nesher and the petcoke is a clear example of "systemic failures" of the type.

Come 2011, the Trajtenberg Committee recommended dealing with such failures by strengthening the public's power of representation. How? By establishing strong consumer groups (strengthening the Fair Trade Authority ).

Three years ago Trajtenberg recommended a different solution - that necessary reforms advancing the general good be included in the Economic Arrangements Law, a hodgepodge of unrelated bills that passes as a package with the annual budget law.

In fact, he felt that the Economic Arrangements Law needed revamping. Throw out the minutiae and leave in only important structural reforms stuck in process because of legislative shortcomings. Ten such reforms should do it, Trajtenberg recommended.

The case of Nesher and the failure to increase tax on petcoke shows there is a crying need for a mechanism to legislate reforms that serve the public, which falter in the Knesset.

The social protest leaders demand that the Economic Arrangements Law be abolished. They see it as a law used by the Finance Ministry to restrain social legislation in the Knesset. But it could be their savior, if only it undergoes the necessary changes.