Israeli Property Tax Discounts Expanded to Benefit More Households, Impacting Municipal Budgets

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 higher discounts, despite the lower marginal cost of additional family members.

Instead of addressing these distortions through budget-neutral measures such as linking eligibility to employment efforts or preventing fraud via income verification through National Insurance data, the Interior Ministry opted to expand discounts across the board. The Interior Ministry claims it only sets the discount framework, leaving municipalities discretion over discount levels, but the Finance Ministry notes most municipalities follow the published discount tables, effectively making the increase universal.

The Finance Ministry warns that weaker municipalities will suffer the most from the revenue loss, with lower socioeconomic clusters losing about 170 shekels per resident, compared to 85 shekels in mid-level clusters. The changes primarily benefit middle-class non-Haredi families with three to five members, but the reforms explicitly preserve the number and extent of discounts for Haredi households. Data shows 91% of households saw an increase in discounts, with only 0.3% experiencing a decrease.

Post-reform, 65% of Haredi households and 53% of Arab households qualify for discounts, up from 60% and 46% respectively, while about 20% of other populations receive discounts, up from 18%. The additional cost mainly burdens the general population (about 600 million shekels), as the Haredi community was already near maximum discount utilization. Average annual discounts are expected to rise to 4,600 shekels for Haredi households, higher than for Arab and non-Haredi Jewish households.

The Finance Ministry emphasizes that property tax discounts should reduce inequality since arnona does not consider income levels. They argue the new model favors stronger populations by raising income thresholds for discounts, for example, households with three children can now earn up to 17,500 shekels monthly to qualify, compared to 14,800 shekels previously. The ministry also stresses that discounts should not undermine municipal revenues or flexible budgets.

Importantly, the Finance Ministry highlights that arnona could incentivize employment if discounts were conditioned on labor market participation. However, the Interior Ministry, currently led by Shas-affiliated officials, rejected linking discounts to employment verification or reforming income reporting, maintaining reliance on self-reported data despite fraud risks. This stance contrasts with legal directives to revoke discounts from draft-dodgers, which the Interior Ministry resists enforcing.