Despite the opposition of Minister of Finance Yair Lapid, the Ministry of Finance Budget Division is supporting a proposal to levy a tax on owners of three or more apartments. The idea was recently presented to Lapid in his meeting with Prime Minister Benjamin Netanyahu, but he announced that he opposed it because it was a new tax. Indications are that Netanyahu will agree to forego the proposed tax. Sources inform "Globes" that Finance Ministry and the Bank of Israel economists asserted during the discussions about the initiative that it was likely to reduce demand for investment apartments and increase the supply of apartments for sale, thereby lowering housing prices in the real estate market. In addition, internal government estimates are that the tax could increase state revenues by NIS 2.5 billion a year. As far as is known, the Bank of Israel has not yet formed an opinion on the matter. The Finance Ministry said in response, "The matter is currently being evaluated by the professional echelon."
The idea of taxing owners of multiple apartments, which was raised several months ago by Finance Ministry director general Harel Locker, has been considered more seriously over the past two weeks, given the attempts to find additional sources of revenue in order to pay for the defense budget increase. Inquiries by Locker show that the tax authorities are aware of 200,000 apartments owned by persons with at least two other apartments. An owner is defined as someone that owns 50% or more of a property. The idea under consideration in recent discussions is to level an annual tax on apartments amounting to 2.5% of their value. Another idea being considered is an annual uniform NIS 10,000 fee to be paid on the third apartment. The main disadvantage of this idea is that it does not distinguish between luxury and ordinary apartments.
Criticism: An inefficient tax
Those in the government who support the proposal believe it will greatly reduce the monetary incentive to buy an apartment for investment purposes in general, and for rental purposes in particular. They believe the tax will cause apartments for sale to pour into the market, thereby increasing the supply of apartments. These two forces will jointly and separately generate downward pressure on the price of apartments for sale in the real estate market. The economists who support the tax add that the tax is progressive, and will be paid almost exclusively by the upper one hundredth income percentile.
Opponents of the idea assert that it means the return of the controversial property tax in effect in Israel during the country's first two decades. The property tax imposed on available land in order to encourage its owners to build was repealed in 2000, following severe criticism of its effectiveness and the high costs of its enforcement mechanism. An effective system for assessing the value of apartments is likely to require the recruitment of hundreds of Tax Authority supervisors.
Another criticism of the tax is that apartment owners will roll it over on renters, including those unable to find an alternative apartment, thus increasing the cost of living for the poor people least able to afford it. Other criticisms concern the tax's ineffectiveness. For example, there is almost no practical way of enforcing its on foreign investors owning several apartments in Israel. It is also alleged that the Tax Authority lacks full information about the identity of those owning three or more apartments, because it does not receive reports on inherited apartments or apartments built in an area rezoned for construction.
Published by Globes [online], Israel business news - www.globes-online.com - on September 16, 2014
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