Israel Tax Authority Warns of Billions in Deficit by 2027

Despite surprisingly strong tax collection in 2026, Israel's Tax Authority is bracing for a significant budget shortfall in 2027, according to its director, Shai Aharonovich. While current revenues are exceeding expectations, Aharonovich cautioned against complacency, highlighting the ongoing costs of the war, increased national debt, and the depletion of the Compensation Fund. The fund, which has paid out billions since the war began, is expected to require state budget allocations as early as next year, as its current reserves are estimated at only a few billion shekels.

Looking ahead to 2027 and 2028, Aharonovich anticipates a substantial deficit, potentially in the billions of shekels, due to sustained high defense spending and the temporary nature of some revenue-boosting measures. He stressed the need to identify new, sustainable income sources rather than relying on measures that could harm economic growth.

Aharonovich proposed several alternative revenue streams, including reinstating property tax on land, introducing a vehicle mileage tax, bringing back taxes on sugary drinks and single-use items, and reducing existing exemptions. He also noted that simply requiring rental income reporting could generate approximately 1.5 billion shekels annually without altering the existing tax exemption.

Furthermore, the Tax Authority is considering a significant reform in VAT collection, shifting to a cash-basis system where businesses remit VAT upon receiving payment. This change is projected to add billions to state coffers by reducing fictitious invoices and tax evasion. Aharonovich also expressed concern over the declining number of new Israeli startups registering domestically, with over 50% now registering in the U.S., potentially eroding Israel's business and tax base. He suggested exploring incentives, such as linking tax benefits for employee stock options to domestic company registration, to encourage local incorporation.