Amendment intended to increase residential property tax Arnona by 20% was canceled

In order to incentivize municipalities to increase residential construction, the government recently issued a bill to raise the property tax (arnona) levied by local authorities on residential areas by 2% annually over the course of ten years. The current residential property tax averages at NIS 49 per square meter – an amount that does not cover the cost of municipal services provided to residents. As long as local authorities continue to oppose residential construction, the government cannot increase the housing supply. Ultimately, the government decided to shelve the move, amid criticism that it would not be effective. 

As part of the approval of the biennial budget for 2021-2022, the Ministry of Finance recently proposed an amendment that sought to raise the property tax rates charged by local authorities on residential apartments. The bill aimed to encourage municipalities to expand residential construction in their areas, thereby increasing the housing supply throughout the country. As part of the amendment, the government intended to reduce the property taxes levied by the authorities on employment and commercial areas, in an effort to discourage non-residential construction in areas designated for these purposes. However, last weekend, the Ministry of Finance decided to shelve the amendment, partially due to predictions that it would be of no use.

According to the proposal for the amendment: “The combination of the gap in high incomes from businesses compared to residents and high expenditures on residents compared to businesses strongly disincentivizes local authorities from absorbing new residents and over-incentivizes them to promote businesses”.

Arnona” is a major source of income for local authorities. The municipal property tax, calculated based on the area of the property, is different in each region, but in almost all cases, the tax levied on residential buildings is significantly lower than in areas designated for employment and commerce. Today, the average rate of residential property taxes in local authorities is NIS 49 per square meter per year, while the average rate for offices, services, and commerce is NIS 174 per square meter – a difference of NIS 125 per square meter. At NIS 81 per square meter, the average tax for industrial usage is also higher than residential. Meanwhile, businesses in the banking and insurance sector pay the most, at NIS 968 per square meter, NIS 919 per square meter more than residential areas.

The proposal to amend the law comes against the background of long-standing struggles between the government and local authorities over the issue of increasing the housing supply throughout the country. Local authorities have tremendous power in determining construction projects in the area under their jurisdiction, from jointly promoting specific projects to issuing building permits – a procedure which is under their exclusive authority.

Since Israel real estate prices began to skyrocket in 2008, all of the various governments have put a lot of pressure on municipalities to increase residential construction in their area, whether by providing incentives or by passing legislative measures that circumvent their power. So far, however, none of these steps have proved particularly successful. 

According to the current budgeting method, the low property taxes levied by municipal authorities on residential homes do not cover all of the services that the authority must provide to its residents, including welfare, education, maintenance, parks, culture, and more. Because of this, every residential apartment building in the city is actually a burden on the municipal budget, so for financial reasons, municipalities oppose large-scale residential construction projects. 

In areas designated for employment and commerce, however, the situation is reversed. The municipality collects high property taxes on these buildings, despite the fact that those who use them require very few services beyond basic sanitation and maintenance. In this reality, it is easy to understand why municipal authorities prefer to maximize areas designated for employment and commerce and keep new residential construction at the bare minimum. 

According to the proposal for the amendment: “The combination of the gap in high incomes from businesses compared to residents and high expenditures on residents compared to businesses strongly disincentivizes local authorities from absorbing new residents and over-incentivizes them to promote businesses”.

The amendment proposed to reduce the property tax rate applied to all business areas by 10% in 2022, including offices, commerce, industry, hotels, banks, and insurance companies. At the same time, the proposal stipulated an increase in residential property tax at a rate of 2% per year over the course of ten years. The gradual increase was designed to give residential taxpayers time to adjust to the heightened costs, instead of burdening them with a sudden jump all at once. 

The move received mixed reactions in the Israeli economic press. On the one hand, there were those who congratulated Finance Ministry Avigdor Lieberman for finally daring to address the issues of the property tax system, after many years in which it has been clear to everyone that it is illogical, unjust, and contributing to the housing crisis. However, even those who welcomed the bill agreed that the gradual rate of increase in the residential property tax compared to the significant reduction for business areas would not lessen the gaps enough to encourage local authorities to expand residential construction. This is the main reason that the proposal was ultimately abandoned.

Some criticized Lieberman for going back on his promise to not raise taxes under the new state budget. Lieberman himself responded to the claim at a press conference about two weeks ago (before the amendment was filed), explaining that he does not define property tax as a regular tax, since it does not go into the state budget: 

“Taxes are what fund the state budget. Property taxes do not come to amend a budget, but rather to facilitate building permits, reach agreements, and not have to fight with local authorities to solve the crisis in the housing market. Municipalities do not want housing; they prefer banks, industry, and commerce – so we lower the property taxes on these areas to balance things out, make things easier for industrial and commercial areas, and put an end to the incessant struggles with the local authorities.”

The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.

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