US Aid Shift to Israel: From Grants to Pentagon Contracts

President Donald Trump announced on Tuesday that the U.S. would cease providing approximately $4 billion in annual security assistance to Israel starting in late 2026. Trump explained that Israel no longer requires the funds and that the aid had become a source of political criticism for Republicans, adding that Prime Minister Benjamin Netanyahu himself proposed ending the aid. However, this potential halt in direct grants may not signify an end to U.S. funding for Israel's defense industries. Ahead of the U.S. midterm elections, both the Israeli government and its supporters in Washington were preparing for increased political difficulty in maintaining the existing aid structure.

A proposed alternative model involves expanding cooperation with the Pentagon. This would allow Israeli defense companies to receive funding through development and procurement contracts, even if direct U.S. aid is stopped in the future. With Democrats gaining control of both houses of Congress following the midterms, they will have greater influence over the fate of aid to Israel. This shift is partly a response to growing opposition to the Trump administration and the war in Iran, which has empowered Democrats to exert more control over committees and the federal budget.

In July, a proposal to cancel Israel's annual aid package of $3.3 billion was brought to a vote in Congress. While it was rejected, 103 Democrats supported it, with 98 opposing and ten abstaining. Greg Casar, chairman of the Progressive Caucus, stated this sends a clear message to Netanyahu that the era of open checks for his wars and war crimes is over for the Democratic Party. Netanyahu himself has expressed willingness to gradually phase out the grants over a decade, stating in an interview that he wants to start the process immediately.

The 2016 agreement committed the U.S. to providing $38 billion in security assistance to Israel over ten years, ending in fiscal year 2028. Trump's announcement suggests an earlier cessation, though details of the new arrangement remain unclear. Of the $3.8 billion annual commitment, $3.3 billion are for Foreign Military Financing (FMF) grants for military equipment, and $500 million are for missile defense cooperation under the Pentagon's budget.

The alternative to State Department funding involves integrating Israeli defense firms directly into the Pentagon's development and procurement system. Instead of the U.S. government giving Israel money to buy weapons, the Pentagon could invest in developing systems using Israeli technology, order equipment from joint ventures, and pay for the use of Israeli technology. This would allow Israeli companies to continue receiving U.S. funding through commercial contracts rather than via Israel's defense budget. This arrangement would not apply to weapons systems Israel purchases directly from the U.S., such as fighter jets it cannot produce itself, which would then be funded from the Israeli budget.

This approach aligns with former Defense Minister Yoav Gallant's view that the U.S. should see aid as an investment rather than a subsidy, citing Israel's ongoing multi-front combat as proof of its battle-tested technologies. A paper by the Israel Policy Forum suggested that Netanyahu's desire to reduce U.S. aid stems from an understanding that traditional aid has become an easy target for anti-Israel attacks in the U.S. They recommend future defense agreements focus on equal partnership, joint investment, and technological development.

Republican Congressman the Republican Congressman introduced a resolution supporting Netanyahu's initiative to replace traditional aid with industrial-security cooperation. The Israeli Ministry of Defense announced official negotiations with the U.S. government for a new arrangement shortly after. The House of Representatives passed the National Defense Authorization Act (NDAA) for fiscal year 2027, including a provision to expand security-tech cooperation with Israel. The Senate is also advancing a similar bill, stemming from a bipartisan initiative by Senators Ted Budd and Kirsten Gillibrand.

Including these initiatives in the annual defense bills simplifies their advancement, as these are comprehensive acts concerning the Pentagon that Congress has passed for 65 consecutive years. However, the legislation is not yet finalized. The Senate's bill has passed committee but not the full Senate, and the inclusion of Israel-related provisions is uncertain. The outgoing Congress could finalize legislation by January 3, 2027, before the new Congress convenes. If not, existing proposals would expire and need to be reintroduced.

A key question regarding the shift from traditional aid to direct Pentagon funding is the level of U.S. public oversight on taxpayer money used for Israel's military activities and arms industry. Under the current system, the Secretary of State determines FMF grant recipients and amounts, subject to congressional budget decisions. With Pentagon funding, decisions are made within its procurement and budget authorities. Both State Department and Pentagon funding are subject to restrictions against aid to military units credibly reported to have committed gross human rights violations.

While the U.S. administration has never withheld aid to Israel based on these restrictions, future administrations might. Anal Schlaine, a researcher at the Quincy Institute, warned that the new procedure could represent a "tectonic shift" in how money is transferred to Israel, impacting transparency and accountability. Elias Yusuf of the Stimson Center also cautions that the U.S. government might argue that joint military projects constitute industrial cooperation, not aid to a foreign country, thus bypassing aid restrictions. This legal interpretation is questionable, but the executive branch has used similar arguments previously.

The liberal Jewish organization J Street also warned that expanded joint projects could allow Israeli arms industries to continue receiving U.S. funding without sufficient restrictions on human rights violations. In contrast, AIPAC welcomed the House legislation, highlighting its contribution to U.S. job creation, innovation, and security. This shift could broaden political interests opposing funding limitations, involving not only pro-Israel groups but also U.S. defense companies, their suppliers, employees, and congressional representatives.

This move aligns with Israel's broader strategy for its defense industries, including reforms to export oversight and potential stock offerings for companies like Israel Aerospace Industries and Rafael. Integrating with the Pentagon's procurement system could provide long-term contracts and increase revenue. This vision is part of Netanyahu's broader goal of a "super-Sparta" economy where war and arms exports are central pillars. The funding model shift transforms the perception of U.S. support from a grant based on shared values to an economic transaction, though the source of funds remains U.S. taxpayers. This change could also allow the defense establishment and arms industry to evade some civilian political oversight, especially as U.S. politics become more critical of Israel.