Finance Officials: Politicians Afraid to Touch Tax Benefits for Preferred Towns

The High Court ruled Wednesday that the benefits discriminate against Arab communities and must be canceled or changed.

The High Court of Justice may have ordered the government to cancel or change the tax benefits for residents of 167 Jewish communities, most of them in outlying areas of the country, but the government is afraid to do so, Finance Ministry officials said on Thursday.

The Tax Authority grants income tax benefits of 13% to 25%, up to a given ceiling, worth a total of NIS 750 million a year.

silwan - Olivia Pitusi - March 5, 2010
Olivia Pitusi

The High Court ruled Wednesday that the benefits are discriminatory and must be canceled or changed, because there is no set criteria for determining which communities are included in the program.

"It's a hot potato that the political echelon in the Finance Ministry is afraid to address," said senior ministry officials.

The tax benefits are considered substantial, and have changed over the years. At first they were awarded only to communities on the country's borders, and later they were also granted to settlements beyond the Green Line. In 2005 the program was expanded to include a long list of communities, including some that had politically powerful mayors.

The largest benefit goes to Kiryat Shmona residents, who pay 25% less income tax than people with similar income in Tel Aviv or Jerusalem.

Petitions were filed with the High Court in 2002 through 2007, claming that it discriminated against against Arab communities. The court issued several rulings on the matter over that period. A response to the judges submitted in 2008 includes a document from the Tax Authority that states, "There are no clear and unified criteria to determine communities' eligibility. The list is compiled piecemeal. The presence of certain communities on the list is surprising."

The Tax Authority then tried to establish set criteria for inclusion in the list. Finance Ministry sources said then-finance minister Roni Bar-On tried to address the matter, but mayors exerted pressure in order to have their communities included. Ultimately, Bar-On made no decisions on the matter, the sources said.

"It's a socioeconomic issue with political aspects. If the treasury cannot set clear criteria and a new list that includes Arab, Druze and Bedouin communities, the High Court will do it. The benefit, worth NIS 750 million a year, needs to be divided in a fairer manner, based on transparent criteria."

Senior ministry officials said they would not leave the matter up to the court, and would discuss the issue with the prime minister and make a decision within 30 days.