In Israel, the property tax, called Arnona, is the main local government tax, representing more than 80% of municipal tax revenue. It is also a major source of total local government revenue, accounting for 36% of municipal revenue. Among OECD countries, only Australia and New Zealand rely more heavily on the property tax for funding local governments. Arnona revenue was 2% of GDP in 2017, more than twice as high as the 0.9% of GDP average among OECD countries. Thus, in addition to being the cornerstone of local taxation, the Arnona is a central pillar of the Israeli system of local government finance.

Property taxation is a central component of local taxation in many countries around the world. Recurrent taxes on immovable properties are considered a good local tax, particularly well-suited for financing local governments. However, like any other tax, the property tax may also create distortions that need to be minimised. In Israel, the design of the property tax system has increased fiscal disparities among municipalities and has several negative consequences on the capacity of municipalities to provide adequate and equitable access to economic and social infrastructure and services across the country as well on local economic development.

To address these issues, the Israeli Ministry of Finance asked the OECD to conduct an in-depth evaluation of local government finance and the Arnona system, and to offer guidance on how to improve and reform the current system. This report includes a comprehensive analysis of the Israeli system of local government finance, a diagnosis of the major problems, and a set of 13 policy recommendations designed to improve the efficiency and equity of the system of local government finance in both the short and long-run. The first eight recommendations focus on improving the system and the remaining five on fundamentally reforming the Arnona system.

This report is part of the OECD Multi-Level Governance Studies series. It was conducted by the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE), under the leadership of the OECD Regional Development Policy Committee (RDPC). The RDPC is a leading international forum in the fields of regional, urban, and rural development policy and in multi-level governance. It has led the way in acknowledging the importance of multi-level governance and place-based approaches tailored to local and regional needs. To support the RDPC's leadership in this policy dialogue, the OECD created the Multi-Level Governance Studies series in 2016, focusing on both country and thematic work. The report was approved by Delegates of the RDPC by written procedure on 20 November 2019 under the reference [CFE/RDPC(2019)12].

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