The "City Tax Fund," known in Israel as the "Arnona Fund," is a bill that appears in the 20th chapter of the Economic Arrangements Bill (EAB) – a bill that the Israeli Knesset passes alongside each national budget. The Economic Arrangements Bill's purpose is to combine all of the amendments to Israeli law that are necessary for the government to be able to implement the budget.
This chapter of the EAB found a fund that, in a nutshell, takes some of the earnings of wealthier local authorities from city taxes ("Arnona)", and redistributes them to weaker ones.
There are four types of local authorities – cities, local councils, regional councils and industrial councils – but for this article's purpose, they will all be named "local authorities". As of 2022, there are 257 local authorities in Israel.
What is the purpose of the funds?
According to the finance ministry, the Fund's purpose is to lower housing prices. One of the causes for insufficient supply – and thus high prices – of housing in Israel, is that the law incentivizes local authority leaders to earmark land for commercial use, and not residential use. How? According to the law, commercial real estate pays a higher city tax percentage than residential real estate.
Simply put, the idea of the new Fund is to incentivize local authorities to build homes, not offices. This, according to the plan, will raise the supply of housing, which in turn will lower housing prices.
According to the new plan, wealthier local authorities will need to contribute to the Fund a portion of their earnings from commercial real estate. The criteria for what exactly defines a "wealthy local authority" takes into account socio-economic factors, geographical factors, and financial factors.
The Fund's executive committee will then redistribute the money by giving all of the local authorities a set amount, currently reported at NIS 2,400, for each residential housing unit they market. By doing this, the government hopes to incentivize both wealthier and poorer local authorities to invest in housing instead of commercial real estate.
According to the finance ministry, local authority leaders will have a majority in the Fund's executive committee, and this will ensure that the money arrives at its destination.
Why does the Federation of Local Authorities in Israel, along with the Knesset opposition, oppose the bill?
The first argument is that the government, with its coalition majority and control of the Knesset Finance Committee, can eventually change the bill with relative ease, and then allow itself to use the funds for other purposes.
A second argument is that the criteria for contributing and receiving money from the Fund is flawed, and could force some local authorities dubbed "wealthy" into financial distress. In addition, the decision to pass the bill as part of the Economic Arrangements Committee does not leave time to think the issue through methodically and come up with a better formula. For example, according to the most recent proposal by the finance ministry, the city of Eilat over a span of five years will be the fifth highest contributor to the Fund, at approximately NIS 25 million. According to Eilat Mayor Eli Lankri, the city cannot afford this, and forcing it to pay could lead his municipality to financial collapse.
A third argument is that the Fund will raise the cost of living for families who live in local authorities that must contribute since these local authorities will need to compensate for the drop in its budget by either raising residential city taxes or by canceling services, which residents will then need to pay more for or travel further to receive.
A fourth argument has to do with two sectors of Israeli society, one which benefits unequally from the Fund, and the other which will not enjoy the funds. The former are local authorities in the West Bank, who will not be able to contribute to the Fund due to the West Bank's legal status. The latter are Arab cities and towns, which suffer from insufficient urban planning and therefore are not able to market as many residential housing units as the other local authorities – and therefore will receive less of the Funds.
For these and other reasons, the Federation of Local Authorities in Israel announced on Sunday that it was going to cease providing municipal services until the Fund is removed from the Economic Arrangements Bill.