Israel's Knesset Passes Netanyahu's Tax Hike, Budget Cuts Package

MKs called back from summer recess to approve tax hikes and a one-year tax break for multinational corporations, as part of efforts to close budget hole.

The Knesset passed Prime Minister Benjamin Netanyahu’s package of tax hikes and budget cuts yesterday evening by a vote of 28 to 16.

But full Knesset approval came only after Netanyahu and Finance Minister Yuval Steinitz compromised on easing the income tax hikes on the middle class.

“We have approved steps to prevent us from entering into a huge deficit in an attempt to protect the Israeli economy and the jobs of Israeli citizens. These steps are responsible for protecting the Israeli economy from the global economic crisis,” said Netanyahu, who appeared in the Knesset for the first time since spraining his ankle in a soccer match a month ago.

The Knesset also approved the increase of value added tax by 1% to 17% on September 1 as part of the government’s economic package.

 Other increases include raising taxes paid by employers by 0.6% and increasing payments to the National Insurance Institute; not updating tax brackets to take into account inflation over the next three years; and a tax surcharge of 2% on incomes over NIS 800,000 a year.

All told, the tax increases will bring in about NIS 7.5 billion in new revenues a year − about half of the NIS 13 billion to NIS 14 billion Steinitz and Netanyahu have said was missing. The rest will have to be made up in spending cuts.

Earlier in the day, Netanyahu and Labor, Welfare and Health Committee chairman Haim Katz (Likud) reached an agreement for a planned 1% income tax hike that would not apply to those making less than NIS 14,000 a month.

In addition, the lower limit for the fourth tax bracket will be lowered from NIS 21,800 to NIS 20,000 a month. This means taxpayers earning over NIS 20,000 a month will now pay a 33% income tax rate. See accompanying box.)

The changes are considered a major victory for the chairman of the Knesset Finance Committee, MK Moshe Gafni (United Torah Judaism), who fought to ease the burden on the middle class − and threatened to torpedo the entire economic package otherwise.

Labor Party chairwoman Shelly Yacimovich welcomed the agreement but protested that those earning high incomes of NIS 42,000 or more will also not see their taxes increased.

Big break for big corporations

The Knesset was called back yesterday from its summer recess to hold a special session on two government-sponsored bills designed to address the current state budget deficit.

The first was the tax hike and budget-cutting package approved by the cabinet only a week ago.

The second − which will give multinational corporations huge tax breaks on profits they have been required to keep in Israel, but will now be allowed to use as they see fit after paying minimal taxes − was approved in its first reading by a 30 to 21 vote.

The large tax break for multinational firms will be in effect for one year and allow them to pay lower corporate taxes and avoid paying taxes on dividends on these so-called “trapped profits.”

This bill will now go to the Knesset Finance Committee and still has to be approved by the full Knesset in its second and third readings before becoming law. The treasury estimates the companies will pay some NIS 3 billion over the next year in taxes on these profits they withdraw.

Yacimovich harshly criticized the bill on corporate taxes, calling it “unconstitutional and illegal.” “Will the prime minister collect the tens of billions that ought be collected by law, or will he place another tax on the weak sectors?” she demanded. Meretz chairwoman Zahava Gal-On called the second bill “robbery in broad daylight,” adding that it changes the rules of the game and “redefines the concept of equality and justice.”

“These corporations owe millions to the state, but because they are wealthy enough, and because Netanyahu and Steinitz are standing before an ever-growing debt, which they are responsible for, they are willing to accommodate them,” she added.

Addressing the Knesset before the vote, Steinitz denied charges of populist or electoral economics.

“These are measured, correct and courageous steps that will protect the Israeli economy and Israeli citizens from the global [financial] crisis. We have economic governance here,” he said.

Relief for the middle class

As for the changes in the package, including the tax hike of 1% for those making more than NIS 14,000,  instead of starting at NIS 8,861, as in the earlier proposal, Steinitz said that “for the weaker strata and the lower middle class there will be no change in income taxes. It will balance out in adjustments to the tax brackets between [incomes of] NIS 14,430 and NIS 21,780.”

Steinitz stressed that “these adjustments will bring about the exact same economic result as far as the total package is concerned. They will provide relief for the middle class and the weak in exchange for a mild increase in the burden of those in the upper and highest classes, making them reasonable and proper adjustments.”

“As with defense, so it is with economics − we are protecting our citizens from the serious risk of negative growth and massive unemployment. We have managed to stave it off until now, and now we must continue to protect our economy, growth and employment; we are obliged to be responsible and serious,” Steinitz said.

Treasury officials said the change would result in NIS 100 million to NIS 200 million less revenue each year compared to the plan approved by the cabinet.

The cabinet will hold its budget discussions and vote on the 2013 budget before the Rosh Hashanah holiday in mid-September, and on August 15 the cabinet will hold a preliminary discussion on the defense budget, said Steinitz.