Under massive pressure, Palestinian Prime Minister Salam Fayyad has suspended his plan to start collecting income taxes as part of a long-term plan to weaning the Palestinian Authority (PA) off foreign aid.
Fayyad had been pushing his taxation plan since last year and made it official in early January, announcing plans to deal with the current financial crisis by doubling the income tax on top earners and forcing companies and other entities to begin paying tax on their operations.
But widespread protests erupted across the West Bank over the plan and when Fayyad met with a group of private sector representatives on Sunday they reportedly told him it was a bad idea.
“To provide an atmosphere of confidence … and partnership to face the financial crisis, [Fayyad] will ask the ministerial council at its next meeting on Tuesday to suspend collection of new taxes,” the Prime Minister’s Office said in a statement, throwing in the glove.
The retreat on taxes is a blow to Fayyad’s much touted state-building efforts, which were the foundation for Palestinians’ bid for statehood recognition by the United Nations. It also means that the PA remains dangerously dependent on foreign donors and taxes collected by Israel.
But state-building takes a backseat to not paying taxes, according to an opinion survey released Monday by Near East Consulting (NEC), a Ramallah-based Palestinian polling company. Palestinians take the view that if the PA faces a financial crisis, it is not there fault – it is Israel’s because of the barriers it imposes on travel and transport.
“We know there is a crisis. We are in need of services. We cannot pay taxes. They say our economic crisis is primarily because Israel is practically strangling our ability to have proper trade so it is not our responsibility. They will not say Israel has to pay for it, so they will say the international community has to pay for it,” Jamil Rabah, NEC’s director, told The Media Line.
According to a NEC poll, only 12 percent of Palestinians believe the imposition of taxes is the ideal solution to deal with the current financial problems facing the PA. The poll, based on a survey of 840 Palestinian adults in the West Bank and Gaza, showed that 54% prefer foreign support as the best way to solve their deficit.
“The poll reflects the sentiment that our [financial] crisis is not our problem but the responsibility of the international community,” Rabah said.
Fayyad had touted his plan to reduce the PA’s deficit with “patriotic” collection of more taxes. He began consolidating its tax collection agencies, computerizing them and training staff.
This was mainly spurred by the massive cash crunch that hit the PA after its bid to win statehood recognition from the UN and gain membership to the UN Educational, Scientific, Cultural Organization (UNESCO). That move cut the flow of US funds and led Israel to a temporarily freeze transferring the taxes it collects for the PA.
Furthermore, foreign donors who have been facing financial crises of their own, have not come through with promised aid and the Palestinian economy has slowed. The International Monetary Fund (IMF) estimates that the economy of the West Bank, which the PA rules while Hamas controls the Gaza Strip, grew just 4% in 2011, half its 2010 pace.
While Fayyad aims to make the PA run efficiently and corruption-free, it still maintains a bloated public sector work force with some 153,000 state employees serving a population of some 3.8 million. With a budget of some $3.2 billion last year, its domestic tax collection came to some $745 million, the bulk of it collected on customs by Israel or paid by Palestinians working in Israel.
This year’s budget is estimated at $3.5 billion, with about $1 billion of it covered by foreign aid. Last year, only $750 million in foreign aid arrived, which was a major factor is running up a $1.1 billion deficit in 2011.
Much of the economic activity in the West Bank centers on foreign-sponsored projects, including from the US Agency for International Development (USAID). Since the Oslo peace accords in 1994, USAID has spent $3.5 billion in development in the West Bank and Gaza Strip.
But these projects are creeping along now since the US began withholding funds in the wake of the statehood bid.
Of the $192 million in USAID assistance pledged to the Palestinians, only $45 million was released by late December. Congress was still withholding $147 million from the fiscal year 2011 budget. Congress did, however, release some $200 million to the PA to help cover their debts and an additional $150 million was given for security assistance.
Rabah of NEC, said the poll was the first time his organization had queried the public on the financial crisis and taxation, so there were no data to use for comparison. He said 34% believed other solutions beside foreign handouts and higher taxes could be found to resolve the crisis.
“Just like Americans don’t want to have money from China, there are some Palestinians who thing the PA needs to improve the way it spends the money,” Rabah said. “A lot of people are in dire situations. From where can they pay? The business sector will suffer from the increased taxation. It is because of the increasing public pressure on him and from the rank and file of the Fatah that this [tax plan] was canceled.”