Analysis

As Coalition Crisis Looms, Promises of Tax Cuts Get Sidelined

With early elections in the air, Netanyahu and Finance Minister Kahlon issued a plan for cutting taxes. But their dispute over Israel's new public broadcaster put their promise on the back burner.

Prime Minister Benjamin Netanyahu with Moshe Kahlon. 2015.
Prime Minister Benjamin Netanyahu with Moshe Kahlon. 2015. Emil Salman

When Prime Minister Benjamin Netanyahu was still friends with Finance Minister Moshe Kahlon two weeks ago, they issued a joint announcement promising Israelis another round of tax cuts soon. Early elections were in the air, which was one reason both men were anxious to announce the good news.

That was then, this is now. Early elections are still in the air, but the atmosphere has become poisonous, with the two men engaged in a tense standoff for the past week over the fate of the new public broadcasting corporation. On Sunday, they met to try to reach a compromise but as of press time had failed.

Ironically the coalition crisis and the growing prospect of early elections has resulted in nothing being done to advance the plans for the tax cuts.

The joint statement offered no details about which taxes would be trimmed or by how much – that was supposed to be decided in deliberations between Eli Groner, director general of the Prime Minister’s Office, and Shai Babad, his counterpart at the treasury.

But sourses said the two have not met over the last two weeks and that no meetings are planned this week either.

Climbing collections
Past and future tax revenues, NIS billions

The planned tax cuts aren’t just a function of election economics: The Finance Ministry’s coffers are awash in tax revenues and Kahlon has been cutting taxes to give back some of the windfall to the taxpayers who paid it.

There are good objective reasons for the growing tax take. Israel’s economy has been growing strongly, and is close to full employment. A surge of car-buying last year, which involves paying steep purchase taxes, helped boost collections as has a crackdown on the black market as a series of one-time events.

Coincidentally, the biggest one-time event of all occurred the same day Netanyahu and Kahlon made known their tax-cut intentions: Intel announced it had agreed to buy the Israeli self-driving tech company Mobileye for $15.3 billion, which would spell a windfall of unexpected tax revenues that could reach as much as 6 billion shekels ($1.65 billion).

Kahlon had been hesitant about unveiling any tax cuts until the treasury had seen all the data for the first quarter and could be sure that the steep 5.8 percent rise in collections in January-February was not going to fade away. But any doubts he had were quickly cast aside by news of the Mobileye deal.

But apart from a foundation of a strong economy and Mobileye, another reason the treasury seems to be collecting so much tax is that officials have been low-balling their targets. This year, for instance, the official target for revenues is 294 billion shekels, a 3.8 percent increase over 2016.

However, on average over the past 18 months, revenues have been rising at a 6 percent annual rate, which would add up to 300 billion shekels of revenues – 6 billion more than the official target. And that’s before Mobileye and the unusually strong collections in the first two months of the year (which are traditionally a slow time for the taxman).

Netanyahu and Kahlon could have used the tax windfall to help pay down the national debt or step up spending on education, health and welfare, but they prefer lowering taxes. If they disagree, it’s only because Netanyahu gives top priority for cutting corporate income taxes while Kahlon opts for personal income taxes.

Last week at TheMarker’s financial conference, Kahlon said he wanted to improve the payback for the lowest-income workers who qualify under Israel’s negative income tax program.

In all events, Groner and Babad can’t begin their work until their two bosses settle their dispute over public broadcasting.