Interior Ministry Report Reveals Fivefold Business Property Tax Gap Between Strong and Weak Israeli Municipalities

The Israeli Ministry of Interior has published its first comprehensive "State of Local Government Report," offering updated data on local authorities across the country. The report highlights significant disparities in business property tax (arnona) revenues between strong and weak municipalities, a gap that partly motivated the creation of the arnona fund, which has faced sharp criticism, especially from larger localities.

The report is divided into four main sections: local government structure and demographics, financial management, government mechanisms, and human capital. It presents an overall positive financial picture for Israeli municipalities but underscores stark differences. Approximately 70% of municipalities are classified as stable or intermediate, while 17% are undergoing efficiency or recovery programs. In 2024, 62% ended the year with a budget surplus or balanced budget, but 38% ran deficits. The cumulative deficit rose from 3.2 billion shekels in 2020 to 4.1 billion in 2024, attributed to ongoing security challenges.

A key financial disparity is in non-residential arnona revenues: strong municipalities derive 26.6% of their 2024 income from business property taxes, compared to just 5.3% in municipalities under recovery. For example, Tamar Regional Council receives about 70.5% of its income from non-residential arnona, while Neve Midbar Regional Council, a Bedouin area south of Beersheba, collects only 0.1%. Collection rates also vary, with 92% in strong municipalities versus 80% in intermediate ones. Average salaries differ markedly, with peripheral municipalities paying about 8,278 shekels monthly versus 15,923 shekels in affluent areas.

Demographically, Israel has 257 local authorities, with 77 cities housing 75% of the population. The Northern District has the most municipalities (93) but fewer residents than the Central District, which has 52 municipalities. Migration trends show a positive net influx only in medium-sized cities between 2020 and 2024, while large cities saw a 40% decline. Construction starts surged by 56% in large cities and 64% in low socioeconomic peripheral areas during this period.

Israel Ozon, Director General of the Ministry of Interior, described the report as a milestone for data-driven policy and transparency, aiming to provide a solid knowledge base for government, local authorities, researchers, and the public. Alongside the report, an interactive dashboard was launched to present the data in various breakdowns.