New Property Tax Discounts Expand to More Households but Reduce Municipal Revenues in Israel

A recent study by the Israeli Finance Ministry's Chief Economist Department reveals that new property tax (arnona) discounts will reduce local authorities' revenues by approximately 1.1 billion shekels and increase the number of eligible households by 100,000, reaching a total of 840,000 households. The reforms aim to correct previous distortions where larger households received disproportionately larger discounts, despite the lower marginal cost of additional family members. Instead of tightening eligibility criteria based on income or employment efforts, the Interior Ministry opted to expand discounts universally, a move described by the Finance Ministry as politically motivated and fiscally damaging to weaker municipalities.

The Interior Ministry sets the discount framework, but local authorities determine the actual discount levels. However, most municipalities reportedly follow the published tables, making it difficult for them to deny the maximum discounts. The Finance Ministry warns that municipalities in lower socioeconomic clusters (1-2) will lose about 170 shekels per resident, while mid-level clusters (3-4) will lose about 85 shekels per resident. The main beneficiaries are middle-class non-Haredi families with three to five members, but the policy explicitly preserves the number and extent of discounts for Haredi households, with 91% of them seeing increased discounts and only 0.3% experiencing reductions.

Post-reform data show that 65% of Haredi households and 53% of Arab households will qualify for discounts, up from 60% and 46% respectively, while about 20% of other populations will benefit, compared to 18% before. The additional cost primarily impacts the general population, estimated at 600 million shekels, as Haredi households were already near maximum discount utilization. Average annual discounts are expected to rise to about 4,600 shekels for Haredi households, higher than the 3,500 shekels for non-Haredi Jews.

The Finance Ministry emphasizes that property tax discounts should reduce inequality by considering income levels and encourage employment by conditioning eligibility on workforce participation. However, the Interior Ministry resisted reforms linking discounts to income verification via National Insurance data, citing concerns over fraud and political considerations. The Interior Ministry, currently led by Shas-affiliated officials, also opposes removing discounts for draft-eligible individuals despite clear legal guidelines. The Finance Ministry warns that the expanded discounts will significantly strain municipal budgets, especially in weaker areas, and miss an opportunity to promote employment through tax policy.