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Azorim is building apartments in the sprawling Motza Illit..(Photo by: Courtesy)
Bad tax
Why should property rights be infringed because the finance minister wants to make a populist show of how he is taking steps to lower housing prices?
Finance Minister Moshe Kahlon’s bill to tax owners of three or more apartments is bad for a number of reasons.

The bill was rammed through the Knesset Finance Committee at the end of last week without giving legislators enough time to consider the ramifications of the many amendments that were added at the last moment. Both the Knesset legal adviser and the Finance Committee legal adviser complained that the procedure of presenting the bill was improper because not enough time was reserved for legislators to study all the amendments.

The bill itself is incredibly complicated. A computation system for determining the level of annual tax that owners of three or more apartments will have to pay is opaque. A special app will be needed to make the calculations.

Also, the valuation system used for the approximately 80,000 apartments and houses owned by about 54,000 citizens who have three or more flats is highly problematic. Valuation will be based on geographic area. All houses of a certain size that are located in the same general area will be assigned the same value.

For instance, an apartment that is located on a busy street with lots of noise and pollution will, under the legislation, be assigned the same value as one in the same general area that is near, say, a quiet public park.

Needless to say, thousands of homeowners will appeal to the courts to claim that the valuation of their apartments and houses is too high.

Also, according to the wording of the bill, taxation will not be based on income, but rather on the number of apartments owned. So someone who owns two huge houses worth tens of millions of shekels each in an upscale city such as Caesarea or Kfar Shmaryahu will be exempt from the tax, while someone with three apartments in, say, Arad, will be obligated to pay it.

And even if the owner of apartments is not receiving any income from them – either because they are vacant or because a son or daughter is living in them – he or she will still be forced to pay the tax. That’s because the tax is based on the theoretical rise in the value of the house or apartment. In other words, the owners of three or more apartments will be taxed on theoretical capital gains. No other asset is taxed this way – not stocks, not bonds, not anything.

Also, a cap of NIS 18,000 per apartment or house makes the tax regressive. People with very expensive properties who receive hundreds of thousands of shekels a year in rent will pay the same tax as someone whose apartment is worth NIS 1.8 million. This hurts the middle class while giving the rich a huge break.

The bill also ignores the market failure that is causing the sharp rise in real estate prices. The problem is low supply, but not primarily because too many apartments are owned by too few people. Rather the real problem is the tremendous amount of bureaucracy surrounding the planning process for housing.

Too few housing units are being built to keep up with demand. Low interest rates on mortgages are further increasing demand while supply remains low.

Nor is it clear that the proposed legislation will convince owners of three or more apartments to sell their assets. Many investors will try to stick it out and hope the legislation will be canceled when a new coalition is voted into office.

Many of the people who own three or more apartments or houses worked hard to acquire their assets.

This is their main source of income. A large proportion probably rely on this income as a form of a pension.

Why should their property rights be infringed because the finance minister wants to make a populist show of how he is taking steps to lower housing prices? Although regulatory steps are sometimes needed to cure market failures, most of the time markets work perfectly well on their own. The main problem with the Israeli real estate market is low supply caused by red tape bogging down the planning process for construction.

This should be the focus of efforts by the finance minister. But apparently it is easier to pass a bill that infringes on the property rights of hardworking citizens.
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