A distortion in the current property tax system creates a negative incentive for municipalities to build apartments and is considered one of the main obstacles to resolving the housing crisis. A reform in the municipal tax structure seeks to encourage residential development and share commercial property tax revenues between municipalities. The planning and building committee of Tel Aviv and other prominent cities that have enjoyed the existing system have gone on strike in protest of the new bill.
A change in the municipal tax (arnona) distribution method proposed by the government in the framework of the Arrangements Law may resolve one of the fundamental problems in the Israeli real estate market – but also raises the objections of Israel’s largest and wealthiest cities, which shut down their planning and building committees this week in protest.
One of the major barriers to increasing the supply of apartments in Israel today, and consequently, one of the chief causes for the high cost of housing, is the reluctance of most local authorities to permit residential expansion. For this, they have a good reason: the property tax collected on every square meter of office space is almost four times higher than the tax collected on a residential meter. On the other hand, however, when it comes to residential units, municipal demands are much higher – education, welfare, culture, etc. The result is that every apartment that is built is in fact an economic burden on the city, and therefore a municipality would prefer to build more offices and commerce, in place of apartments.
This situation has been acknowledged for many years, but not much has been done to deal with the issue, mainly due to an unwillingness to enter into political struggles with the wealthy local authorities that benefit from the system – first and foremost Tel Aviv. However, in the framework of the current Arrangements Law, the government is presenting a solution, for the first time, in the form of an “arnona fund” to which a certain percentage of the local authorities’ profits on arnona from businesses will be transferred, and these funds will be redistributed among the authorities according to their construction capacities.
The local government, in particular the “Forum 15”, which unifies the financially sound cities, has already announced strong opposition to the measure and even announced the shutdown of the planning and building committees of all its member authorities as of today (March 19).
According to the data appearing in the explanatory notes attached to the bill, residential arnona rates are significantly lower than most non-residential arnona rates. For example, the average rate of residential property taxes in all local authorities is NIS 52 per square meter, while the average rate for offices, services, and commerce is NIS 184, which is almost four times greater.
Therefore, commercial real estate, which is used for business and employment, is the source of wealth for local authorities. Cities that contain a large amount of commercial space are rich cities, and municipalities that have little commercial real estate are poor. Since most of the commercial and employment areas naturally tend to be concentrated in metropolitan cities, and in the Dan region in particular, most of the 257 local authorities that currently exist in Israel are on the poorer side. For example, while Tel Aviv enjoys revenues of about NIS 2 billion a year from business property taxes – about 5,000 shekels per resident, Harish’s income amounts to a few million shekels, around 200 shekels for each resident.
Municipalities that do not reach budgetary balance due to their low revenues, which constitute the majority of authorities in Israel, require grants from the government in order to reach a balance. However, it is clear that even in this situation, the services that the Authority is able to provide to its residents are far more modest compared to a wealthy city.
The step that is currently being proposed in the Arrangements Law is intended to achieve two goals: The first is to reduce the incentive that currently exists within the local government to promote more commercial and employment areas and to increase the motivation to build housing, and the second is to somewhat reduce the huge gap in economic capabilities between the various authorities.
Therefore, according to the proposal, a certain percentage of the total increase in the business property tax revenues of the various authorities relative to the revenues of 2022 will be directed to the fund for incentivizing residential construction. The fund will be managed by a board of directors composed of mayors and resources will be distributed among the authorities according to the volume of new construction. For any permit for a housing unit issued from 2021 onwards, the Authority will be entitled to a grant of NIS 2,000 annually, starting three years after the permit was issued.
For example, an authority that issued permits for the construction of 1,000 apartments in 2021 will receive an annual grant of NIS 2 million, which it will begin receiving in 2024 and each subsequent year, thereafter. If permits were issued for the construction of 1,000 additional apartments in 2022, then in 2025 the annual grant will grow to NIS 4 million, if it issued permits for an additional NIS 1,000 in 2023, the annual grant will grow in 2026 to NIS 6 million, and so on. The bill also includes a grant of NIS 1,500 for each apartment for which a permit was issued in 2018-2020.
As noted, the proposed law aroused anger among the most dominant municipalities in Israel, which are incorporated in the “15th Forum” – a forum of independent cities that do not need balanced grants from the government. Last week, the forum’s management, headed by Tel Aviv Mayor Ron Huldai, decided that in protest of the move, the planning and building committees would shut down as of Sunday, meaning that they would not approve any building plans or issue permits.
In a statement, they said: “The Arrangements Law that the government is currently promoting in a destructive and unprecedented manner will severely harm the powers and abilities of the local government to perform its functions, to manage the cities of Israel, and to provide services to citizens and residents.” They also said that “as long as the government continues to advance these measures, Forum 15 will intensify the struggle, including shutting down the education system in the cities.”
We will have to wait and see how the struggle between the parties develops, and how the housing market will ultimately be affected.
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