Tax Authority Head Warns of Budget Shortfall, Proposes New Taxes

The head of the Israel Tax Authority, Shai Aharonovich, has warned that the state budget will need to fund the War Damages Compensation Fund starting next year, a significant new financial burden. This comes as defense spending is set to increase by tens of billions of shekels. The fund, managed by Property Tax and Compensation Fund, covers physical war damages, primarily to buildings and vehicles, with compensation capped by Tax Authority tables, though supplementary insurance is available for a few thousand individuals.

In the past year, tens of thousands of claims totaling billions of shekels were filed following two rounds of conflict with Iran, in addition to claims from the "Swords of Iron" war. Aharonovich stated at the Duns 100 annual forum that the fund has already disbursed 20 billion shekels since the war began, and has utilized 100% of purchase tax revenue in 2024 and 2025. He anticipates that remaining funds will be depleted, necessitating state budget allocations in 2025.

Aharonovich reiterated his call for a reform to VAT collection, shifting it to a cash basis. He argued this would benefit small businesses and self-employed individuals by allowing them to remit VAT only after receiving payment from customers, and would also reduce bureaucracy. He expressed surprise at the opposition to this proposal, calling it a "win-win" situation.

Addressing the growing budget deficit, Aharonovich suggested alternative revenue streams instead of raising corporate tax or VAT. He proposed reintroducing property tax on land, a travel tax on all vehicles, taxes on sweetened beverages and single-use items, and reviewing existing tax exemptions. Specifically, he suggested taxing returns on severance funds after they are released, and questioned the VAT exemption in Eilat, calling it excessive. He also proposed mandatory reporting for rental income, which could generate an additional 1.5 billion shekels, and suggested reviewing the exemption on residential property, valued at over 4 billion shekels annually, emphasizing that these are matters for political decision.