Are we on the road to a radical change in the real estate market? Sources tell Globes that the Ministry of Justice, the National Planning Department and the National Planning and Building Council have begun promoting a comprehensive reform of the improvement tax, including studying the possibility of completely eliminating the tax and creating a new mechanism to tax land value increases resulting from planning changes.
An improvement tax is a local tax collected from landowners after a plan is approved that increases the value of the land, a building permit is granted, planning regulations are relaxed, or an exceptional use is approved. The tax, with some specific exceptions, is 50% of the increase in the value of the land, and almost anyone who owns a property will pay an improvement tax at some point.
Every year, billions of shekels in improvement fees are collected from property owners in Israel. The fees go directly to local authorities and are one of their main sources of income. Therefore, any change in this area, and certainly the abolition of the fees, will have a significant impact on the finances of local authorities.
Deputy Attorney General Carmit Yulis is leading the move to reform the improvement tax, in cooperation with the Chairman of the National Planning and Building Council, Rabbi Natan Elnatan, and the Director of the Planning Administration, Rafi Elmalach.
The idea of an improvement tax is simple. A person benefits from an increase in the value of his property through the actions of the state (usually through a local planning authority). On this basis, and in accordance with the principle of distributive justice, the state “captures the value of the land” that has been improved, and imposes a tax that is transferred to the local authority in whose jurisdiction the property is located. With this money, the local authority can finance the costs of planning and development in public areas, and indeed any public investment in its jurisdiction.
But over the years this simple tax has become a bureaucratic monster. Land improvement estimates, determined by surveyors and often not uniform, are constantly challenged by the taxpayer’s own surveyors, and end up in the office of the surveyor, in appeals committees, and in the courts. The calculation of the tax has become extremely complex, due to a mess of regulations, plans, and legislation that affect the way it is implemented. Thus a situation has arisen where an instrument that was supposed to express a specific element in the world of real estate, namely “land value capture” to help finance public investment, has swelled to such enormous proportions that it has delayed projects and provoked endless disputes. The planned reform seeks to change this reality.
“There are different trends of thinking on this issue, and at the moment this is the trend, but the situation will definitely not remain as it is,” a source familiar with the details told Globes. Another source said: “I have heard many voices, both in the Ministry of Justice and in the top planning institutions – the National Planning and Building Council and the Planning Administration – calling for the tax to be completely abolished. In academic circles too, the prevailing opinion is that this is a tax that should be abolished. There are many problems with this tax, and it basically creates uncertainty in the sector.”
“It’s a crooked, substandard, unserious method that harms the entire public,” says Amit Gottlieb, head of the Tel Aviv and Central Israel branch of the Israel Builders Association. “We created a complex mechanism that costs us time, money and health. The land that I could sell in one year only takes four years, because of the uncertainty that this mechanism creates. It’s something that needs to be fixed.”
Abolishing the improvement tax entirely is just one of the possibilities being considered. Another possibility is to keep the tax, but change the way it is applied to make it clearer and more certain. Earlier this year, the Interior Ministry published a draft law aimed at bringing order to this area, but so far no progress has been made. In any case, there is a long way to go before the changes are actually implemented. One reason for this is the war. Another is the opposition of various pressure groups, especially local authorities. A report by the State Comptroller published in July 2024 states that “revenues from the improvement tax have a tangible impact on the financial situation of the authorities and on the means they have available to plan and develop public space, build public buildings, and thus provide appropriate services to their residents in these areas.”
The report stated that the total revenues of local authorities from improvement fees amounted to NIS 8.7 billion in 2021. According to the Knesset Research and Information Center, the total in 2015 was NIS 3.6 billion, meaning that revenues from this source more than doubled in six years.
Worldwide, improvement fees are not common, and most countries use other methods to collect land values and contribute to the public treasury. The State Comptroller’s report indicates that only 20% of the countries surveyed collect fees in the manner that Israel does.
This article was published in Globes, Israeli Business News – en.globes.co.il – on September 4, 2024.
© Copyright Globes Publisher Itonut (1983) Ltd., 2024.
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