A Review of Local Government Finance in Israel

Reforming the Arnona System

image of A Review of Local Government Finance in Israel

This report provides a comprehensive analysis of the Israeli system of local government finance, with a focus on the role of the Israeli property tax, known as the Arnona. Local governments are financed through a combination of revenue, primarily from central government grants and from the Arnona, which is levied on residential and non-residential land and buildings but is based on their physical size rather than their value. The first chapter provides a description of the Israeli system of local government finance and compares it to local government finance in OECD countries. Using standard criteria for the evaluation of taxes, the second chapter assess the strengths and shortcoming of the Arnona and the intergovernmental grant system. Attention is paid to fiscal disparities among municipalities and to the ability of the current system to provide all Israelis with adequate and equitable access to economic and social services and infrastructure. The final chapter presents a set of 13 policy recommendations divided between proposals for improving the existing Arnona system and a longer-run blueprint for a more substantial reform of the system of local government finance in Israel based on the establishment of a value-based system of local property taxation.


Diagnosis of the major problems with the Arnona and the financing of local governments in Israel

Chapter 2 provides a diagnosis of the most important problems with the way that Israel finances its local governments. The major focus is on the Arnona, the Israeli property tax, which is the major source of revenue raised directly by local governments. The analysis draws on data and information presented in Chapter 1 and on best practices found in other OECD countries. Although, as an area-based system, the Arnona is quite different from property tax systems found in most other countries, it is similar to all property taxes in that it is a recurring tax on immovable property. The chapter begins with a discussion of the advantages and the disadvantages of the property tax as a local government source of revenue. It then evaluates the Arnona relying on a standard set of criteria used by economists. Special attention is paid to land-use incentives created by the tax and to the distribution of tax burdens across households. The chapter then considers the adequacy of local government services, with a focus on public education and social services. It concludes with an assessment of the role of grants in reducing fiscal disparities among local governments.


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