The writer is an economic consultant for local authorities, a company called Bild Urban Strategy
At the end of June, the local authorities completed the process of approving the exceptional requests for changes to the property tax order for 2023. We, the residents of the municipalities, will pay the updated rates starting January 1, 2023. The process of exceptional requests for changes in property taxes began in 1992, when the government regulated the updates of property taxes in the Law of Arrangements. A decade before, authorities could update the rate on their own, but the inflation of the 1980s and moves to stabilize the economy in 1986 put an end to that.
In 1992, the centralized relationship we know today was defined – the state determines the automatic update, the minimum rates (what is commonly called a “normative rate”) and the maximum that the authorities are allowed to charge for residences and the main classifications. The authorities can request, as part of an exceptional request, to design their property tax rates a little – a window of local independence within a system that is considered the most centralized in the developed countries.
If in the 1990s the applications were made in a sloppy and disorganized manner, in the last decade and a half there is an orderly outline for submitting the applications, and in recent years it has become more and more bureaucratic. But the process itself is often hidden from the public’s eyes and is not that interesting to him. The issue that interests the majority of the public in the context of these requests is, naturally, a reduction of property tax rates or at least their freezing. This issue receives excessive public attention and authorities that work to reduce the rate are applauded, even by their most critical residents.
The new tables represent a significant change
Until 2022, the normative rate was derived from the rate tables of the balance grant formulas and was mainly based on the socio-economic cluster of the Authority. Towards 2023, there was a significant change in the Ministry of the Interior’s approach to the issue, and for the first time, it presented, as part of the application guidance documents, a new normative tariff table, based on a socio-economic cluster and a peripherality index.
These normative rate tables (there are three tables, for each calculation method) are a significant change in the approach of the Ministry of the Interior towards property tax rates and a significant signal to the local authorities as to what is the correct rate for collection from residences and what are the limits of the decree in reducing the rate.
If in recent years the Ministry of the Interior and the Ministry of Finance tried to influence the residential property tax rate through the main door – amendments to the settlement laws – then this time the Ministry of the Interior is taking a back door approach. Instead of forcing the authorities to increase the residential property tax rate, they are expressly prevented from reducing it while setting a very high threshold.
how tall In half of the municipal authorities, the normative rate is 40% higher than the average rate. In other words – the Ministry of the Interior thinks that the general property tax rates in Israel should increase by 40%, and the rate in the powerful authorities should be even higher.
The consequences: in practice it is impossible to reduce
The gap between the actual rate and the normative rate has several consequences that residents and authorities should be aware of.
1. Only the local authority is allowed to request and lead unusual changes in the property tax rate – the rates will not increase as a result of updating the normative rate table, unless the authorities request to increase them.
2. However, lowering property tax rates has become impossible in most authorities. In fact, the Ministry of the Interior clearly tells the local authorities “property rates are low, we will not allow reductions”.
3. The difficulty of reducing rates also exists in the weaker neighborhoods. The Ministry of the Interior allows the authorities to adjust the socio-economic cluster of the neighborhoods and the rates (according to property tax areas), but the normative rate for the lower clusters is higher than the minimum rate that applies in most authorities.
4. The calculation of the balance grants is adversely affected by a negative gap between the normative rate and the actual average rate. If the Ministry of the Interior uses the new tables of the normative rates also in the calculation of the balancing grants, it actually reduces the calculated grant and therefore many authorities may see a freeze on the actual grants.
5. Independent authorities, which do not receive balancing grants, are less affected by the change. If so, many of them star in the list of authorities with the largest gap between the average rate and the normative rate. Residents of these municipalities are not expected to see reductions in property tax rates in the foreseeable future.
Bottom line: more tailgate fixes
For many years there has been talk of the fact that the structure of local taxation in Israel is problematic, that the taxation of residences is low in relation to the expenditure on residents and that a significant change in the current system is required. For many years the Ministry of the Interior drags the issue and does not bring a new proposal to the table but always chooses the back door approach, often without dialogue with the local authorities. There is a problem with the current taxation system that creates many negative incentives for the authorities, but back door fixes are not the way to deal with the issue.
True, the unstable political situation is not exactly a comfortable platform for making changes, but this is an issue with long-term consequences that does not depend on the identity of the government composition. The time has come to change the local taxation system in Israel properly, with primary legislation and not with the salami system or through the Settlements Law.