The Budget's in Danger: Taxes and Deficit May Rise

The Israel Corporation Law exempting it from tax on dividends may be repealed

The Finance Ministry is preparing for the possibility that it may have to increase the budget framework because of the tremendous demands of the defense establishment, and the costs of rehabilitating the north.

At this stage, no actual decision has been reached to shatter the budget, which would mean increasing it by more than 1.7%. But there is concern that it may be inevitable, in which case the government has to decide from where to take the money: hike taxes, or borrow, which translates into widening the deficit.

The treasury prefers not to increase the deficit beyond 3% of GDP, in order to preserve Israel's credibility. That is the maximal deficit the government may run this year under the law it passed itself, and under Israel's undertaking to the U.S. when receiving loan guarantees. The more likely option is that taxes will be raised.

If and when, the treasury hopes to be able to institute "smart" tax hikes that do not reverse its trend of abolishing tax inequities. It has in mind to abolish exemptions from tax that had been enacted for partisan reasons, not economic ones. Treasury officials estimate that the state can gain NIS 3 billion to NIS 4 billion this way alone.

One tax break it might reverse, is to abolish the VAT exemption on fruit and vegetables. It might also slap tax on gains from training funds and abolish tax breaks in border towns in the north, which are about to get large chunks of state funding to rebuild. Abolishing that exemption alone should increase annual tax revenues by NIS 750 million, the treasury estimates.

Other esoteric tax breaks that scream for eradication is the city of Eilat's exemption from VAT, tax incentives for the gas and oil exploration companies, and duty-free shopping at the Ben Gurion International Airport which serves mostly the rich anyway.

Then there is The Israel Corporation Law, which exempted the company from paying tax on dividends. It was enacted in 1968 to encourage the Baron Rothschild to buy the company from the state. Today the company is owned by the Ofer Brothers and there is no possible justification for keeping the law in the books.

The Israel Corporation commented that in the decades since the law was enacted, almost all the tax benefits it contained have eroded away, and adds that it complies with the law.