Global Trouble Threatens Tax Reform

Budget proposal for 2009 is based on a tax revenue forecast widely considered unrealistic.

There's no consensus at the Finance Ministry about the income tax cuts planned to take place in 2009, but at least some officials insist that under the circumstances, they can't be done. The global crisis has slammed into the real economy, and one effect is that the state's tax income has been falling well below expectations. Moreover, the budget proposal for 2009 is based on a tax revenue forecast widely considered unrealistic. These are not circumstances conducive to income tax cuts, argue some officials.

Treasury director-general Yarom Ariav and tax commissioner Yehuda Nasradishi argue in favor of proceeding with the tax cuts as planned. State budget director Ram Belinkov, however, said at the Rosh Pina conference on media last week that he thinks the reform should be ended, or at least be suspended.

Finance Minister Roni Bar-On hasn't made his position known yet, nor have accountant-general Shuki Oren or long-term savings commissioner Yadin Antebi.

The state's tax collection target for 2009 (on which the budget proposal is based) is NIS 190 billion. But with Israeli economic growth expected to slow (if not drop into negative territory), the fear is that collection won't reach that level. Some think collection could fall as low as NIS 13 billion below the target.

The reform is a multiphase one that began in 2006, and is supposed to reach its climax in 2010. Both corporate tax and income tax for households are supposed to fall this coming January, at a cost to the state (in terms of lost income) of NIS 2 billion to NIS 3 billion. A few months back Bar-On tried to extend the reform over more years, but his legislative drive was ruined by his attempt to tack on tax on training funds, which triggered howls of protest among unions.