Lapid’s VAT-exemption housing policy stumbles

Bill would have absolved some first-time home-buyers from paying 18% tax; Flug: Discount will go to construction companies, prices to stay neutral.

Finance Minister Yair Lapid (photo credit: REUTERS)
Finance Minister Yair Lapid
(photo credit: REUTERS)
The central bill Finance Minister Yair Lapid has pushed to bring down the high cost of housing – the issue beneath the social protests that fueled his party’s strong showing in the last election – hit a wall in the Knesset Finance Committee on Tuesday, making it highly unlikely to pass into law as expected during the summer session.
The bill, known as the 0 VAT law, which would have exempted some first-time home-buyers from paying the 18% value-added tax, was expected to go into effect in September.
In order for that to happen, Lapid would have had to push it through the Finance Committee and second and third readings in the full plenum by the end of Wednesday, at which point Knesset will adjourn for its summer recess.
Yet fierce opposition to various aspects of the law, which has faced a slew of criticism from a diverse range of politicians, NGOs, businesspeople and technocrats, stalled it in the committee Tuesday, with no plans to take it up again before the Knesset session’s end. An amended version of the law may still pass in the next session, which begins in October.
From the get go, the policy had a rough reception.
When Lapid first announced the policy in March, the Finance Ministry’s chief economist Michael Sarel resigned in protest, arguing that the law would be ineffective at reducing prices, expensive for the budget, and difficult to get rid of in the future as people got used to the benefit. As the conditions changed, the bill’s cost rose from an estimated NIS 2 billion a year to NIS 3b., according to figures cited by Finance Committee chairman Nissan Slomiansky.
Bank of Israel Governor Karnit Flug, the chief economic adviser to the government, also publicly voiced opposition to the law.
Instead of finding ways to increase housing supply, the absence of which has been a key driver of housing price increases, the law would spur demand, already inflated by the low interest rate, she argued.
Much of the discount would go to construction companies selling the apartments, and prices would stay neutral at best, or perhaps even rise further.
Commentators accused Lapid of pushing populist policy, catering to his base with a law that sounded good, but was ultimately destructive.
Economists feared that the housing market would freeze up until the law went into effect in September, as young couples planning on buying houses would postpone their purchase in hopes of taking advantage of the benefit, and then flood the market all at once.
Indeed, while prices have remained high – home prices have roughly doubled in the past seven years – sales in May dropped to their lowest levels since 2005, according to the Finance Ministry, with sales figures looking even worse for June.
But other provisions in the law caused problems as well.
The bill gave different terms and levels of benefit for those who had served in the army or national service, and those who had not, eliciting accusations of racism from Arab rights groups and even anti-Semitism from religious parties. Arabs and ultra-Orthodox Jews tend not to serve in the IDF or civil service.
Such provisions also elicited a challenge from the attorney-general, who said the law would not pass muster with the Supreme Court. Though the attorney-general approved a later version of the bill that reduced the difference in benefits for the groups, the Knesset’s legal adviser continued raising objections to the law’s legality, noting that while it would benefit some groups far more than others, the housing crisis affected all groups.
Most recently, Slomiansky sought to make the law temporary, and introduce further differentiations in benefits for combat soldiers and non-combat soldiers or national service participants. Yet these issues are unlikely to deflect a legal battle in the Supreme Court if the bill is approved by October.
On the bright side, the law’s failure to pass will give Lapid some wiggle room as he prepares the 2015 budget.
Operation Protective Edge is expected to cost the government billions of shekels, and Lapid must balance between paying for it from the current budget and next year’s budget. He has vowed not to further raise taxes, and will be under pressure from the Bank of Israel not to break the deficit targets it has recommended.
The fact that the law faltered in the middle of a military operation may also help Lapid save face, though his attempts to push it through while the IDF battled Hamas also drew criticism.
“While the nation of Israel in its entirety is shocked and dealing with the unending horrors of war, the finance minister is insists on decisions with far-reaching implications without allowing a strategic, substantive discussion,” Labor MK Stav Shaffir said.
Meanwhile, another of Lapid’s financial policies, which would limit executive pay at large financial firms, passed its first Knesset reading on Monday. The bill would cap tax benefits on an executive’s salary at NIS 3.5 million a year, which is roughly $1 million.