The leadership of the Finance Ministry, headed by Budget Commissioner Maharan Frozenfar and Chief Economist Dr. Shmuel Abramzon, instructed the head of the Tax Authority, Shay Aharonovich, to prepare a new tax collection plan before the elections and the formation of the new government.
According to estimates, the next government will be formed in January 2027, and its first decision will be to hold discussions on the state budget and to prepare a two-year budget and economic arrangements law.
The handling of the revenue side will be critical given the fact that the scope of expenditures is increasing, while economic growth will not be sufficient to cover the revenue side. Moreover, starting in 2025, the indexation of wages and tax credit points to inflation has been discontinued.
This move has effectively eroded workers’ real wages by more than 5%, and there is no intention to extend it. The Tax Authority has prepared legislative amendments in the field of taxation in order to expand the tax base. The plan is being drafted in light of the fact that understandings with the Histadrut regarding labor peace will expire in March 2028, and the goal is to avoid a labor dispute in the economy.
The emerging plan includes the cancellation of existing VAT exemptions on several areas, including the exemption in Eilat, the exemption on fruits and vegetables, the exemption on inbound tourism services, and the exemption on purchases from foreign online commerce sites.
The authority intends to impose, for the first time, a tax on owners of investment properties who collect rental income. The current tax exemption threshold stands at NIS 5,654, and the assumption is that abolishing the exemption will generate an additional NIS 2–3 billion in annual revenue. Income above this amount is subject to a 10% tax obligation.
Alternatively, this involves imposing a reporting requirement on rental property owners even if no tax is ultimately paid. Another issue will be a reassessment of the “trapped profits” reform, which effectively led to a halt in investments due to the requirement to distribute dividends subject to tax.
In contrast to existing proposals by the Bank of Israel, the Finance Ministry is not recommending tax increases. In addition, populist plans such as that of the government’s economic adviser, Professor Avi Simhon, to reduce VAT from 18% to 17%, are being rejected outright by the Finance Ministry. Such a move is considered practically unfeasible, with concerns that it would create difficulties in tax collection.