The Finance Ministry is said to have plans for a series of tax changes, including the freezing and lifting of benefits for pension savings and advanced study funds, as it seeks to bring down the large budget deficit and finance the ongoing war with the Hamas terror group in Gaza.
To offset increased military and civil costs of the war, the government will need to implement tough spending cuts and introduce tax changes to increase state income and deal with a fiscal hole in 2025 of an estimated NIS 30 billion ($8 billion) to NIS 40 billion.
Earlier this month, Finance Minister Bezalel Smotrich presented an initial state budget framework for 2025 based on a deficit target of up to 4 percent of gross domestic product. For this year, the government had to raise the deficit ceiling to 6.6% of GDP, from a planned 2.25%, due to higher defense and civilian spending.
Direct war costs have ballooned to more than NIS 250 billion since war began on October 7, when Hamas terrorists invaded Israeli southern communities near the Gaza border, massacring some 1,200 people and kidnapping 251.
As part of the proposals to generate new sources of income to meet the deficit target set for 2025, the Treasury seeks to levy taxes on the interest and profits accumulated in advanced study funds starting from January 1, according to reports in the Hebrew press. The change is estimated to bolster state revenues by NIS 1.4 billion annually. The draft proposals have not yet been officially released, said the Finance Ministry when contacted by The Times of Israel.
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The advanced study fund, also called an education fund — or, in Hebrew, keren hishtalmut — is Israel’s only short-term, tax-free savings plan. The fund allows investors to withdraw money accumulated after six years without paying a capital gains tax. If money is withdrawn before the end of the six years, the fund owners are liable to tax penalties. If the new proposed tax measure is approved and implemented, it will be applicable to the interest and profits accrued from the start of 2025 and will need to be paid by savers once the funds are withdrawn.
Prime Minister Benjamin Netanyahu, right, and Finance Minister Bezalel Smotrich attend a Knesset vote on the state budget, February 7, 2024. (Yonatan Sindel/Flash90)
In addition, the Treasury is looking into making changes to the current benefits on the deposit for pension funds. According to the proposal, the deposit limit for pension savings that is tax-exempt will be lowered. The move is expected to generate NIS 1.1 billion in annual income.
The Finance Ministry is also proposing to tax so-called “trapped profits,” which are gains earned by corporations and multinationals that are not distributed as dividends to shareholders but invested into business development, infrastructure, and research and development centers. Until now, trapped profits were tax-exempt to encourage investment in Israel. If the new tax is approved by the end of 2024, it is expected to generate NIS 10 billion in revenues in 2025.
Finance Ministry officials also seek to freeze a number of planned tax changes and benefits in the coming three years, a move that is estimated to lead to an increase in state income of NIS 2.6 billion starting in 2025. Those include the adjustment of tax brackets to changes in the consumer price index, tax exemption from appreciation tax on the first apartment, and negative income tax.
Other measures include lifting the VAT exemption on inbound tourism, which is expected to bring in an extra NIS 3 billion a year once tourists come back to Israel; narrowing tax benefits on the purchase of electric vehicles; and raising the additional tax rate on earned annual income of above NIS 721,560 from the current 3% to 5%, which is estimated to yield NIS 2 billion a year.
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