Finance C'ttee set to allow massive arnona hike

The Knesset will discuss an amendment that would let municipalities change the way they calculate local taxes.

On Tuesday, the Knesset Finance Committee will discuss a legislative amendment that will give the interior minister and the finance minister the authority to allow municipalities to change the way they calculate arnona (local property tax) for businesses and households. The discussions will anger the business sector, which has been campaigning against high arnona rates levied by many municipalities, and warns that the measure will result in a general arnona rate hike.

The Finance Committee is expected to allow municipalities to change the method for calculating arnona, which has not been changed since 1985. The discussion is part of a government decision from May 2013 to improve local government budget stability. In that decision, the government decided that, in 2014, financially sound municipalities would give the government NIS 450 million in 15-year loans. The municipalities have already given the loans, which were financed from bank loans. At the end of the loan period, the government must repay the loans. In exchange for the loans, the government allowed financially sound municipalities to raise arnona by 0.3%.

The government also decided that the finance minister and interior minister would be authorized to approve municipalities' request to change the method for calculating arnona. Until now, the two ministers can only approve municipalities' request from arnona hikes, but the method of calculation is set in mandatory tax directives and the ministers do not have the authority to change these without a legislative amendment.

As a result of this situation, municipalities whose historic directives set arnona solely on the basis of a home's area, excluding balconies and parking spaces, and which wanted to add this space for calculating arnona, could not do so.

Conversely, municipalities whose historic directives allowed them to include balconies, parking spaces, and common spaces in buildings, and where neighborhoods of high-rises with large common areas were built, residents were paying arnona on space that could equal double the size of their apartments, resulting in huge tax payments. These municipalities also could do nothing, except to ask the finance minister and interior minister to change the method of calculation. Their requests were denied.

In practice, municipalities with budget deficits and which did not levy arnona on common and other spaces could ask the Ministry of the Interior and Ministry of Finance to change the method of calculation, which could generate hundreds of millions of shekels in local tax revenues. For example, Holon and Herzliya, which levy arnona on a home's net area, could change the method of calculation to sharply boost arnona payments, especially for new buildings.

Conversely, Givatayim and Ganei Tikva, which levy arnona on common spaces and balconies will have the option of asking the ministers to change the method of calculation to exclude all or part of these common spaces for the purpose of arnona.

Manufacturers Association of Israel CEO Amir Hayek says, "The gun which appeared in the first act is being fired in the third act. It's hard to see a situation in which the law is amended to allow minister to approve methods of calculation without it being used to raise arnona. We're trying at Minister of Finance Yair Lapid's office to change the ministry's position ahead of the Knesset discussion."

The Manufacturers Association has warned that the amendment will cause municipalities to change their current methods of calculation to include areas currently defined as public space, such as stairwells and parking spaces in apartment buildings. "If the amendment is passed, municipalities will receive a 'gold check' in the form of permission to collects billions of additional shekels a year in arnona directly from residents and the business sector," it says.

The Ministry of Finance said in response today, "The update of the regualtions is intended to correct the current situation in which it is legally impossible to change the method of calculation, including reducing arnona payments. Changing the method of calculating arnona in line with the new regulations is subject to review by experts at the Ministry of the Interior and the Ministry of Finance, and subject to the approval of the interior minister and the finance minister."

A top government source told "Globes" today that the amendment was designed to correct a flaw that shackles the ministers in cases where municipalities actually want to lower arnona. The source said that nothing in tomorrow's Finance Committee discussion would change what he called "the rules of the game." He added, "In any case, municipalities that want to change the method of calculation will have to ask the ministers, who will use their discretion whether to approve it or not."

There are grounds for the Manufacturers Association's concerns: for a long time manufacturers and businesspeople nationwide have protested arnona hikes and the Ministry of the Interior's lackadaisical way in approving municipalities' request for charging excess arnona from businesses. Last week, the Tel Aviv Chambers of Commerce published a comprehensive study which stated that in 2012-13, business overpaid NIS 200 million in arnona in at least 60 municipalities across the country. It warned that businesses could pay NIS 100 million more in 2014 if the requests for arnona extra payments are approved.

Published by Globes [online], Israel business news - www.globes-online.com - on January 6, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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