Social and environmental factors affecting the amount of property taxes collected by local authorities in Israel

Abstract

The payable amount of municipal property tax in Israel, locally known as Arnona, is based on the property's physical size, functional use, and several locational attributes, but not on the property's value, as more common elsewhere. This unusual taxation system originated in the late 1960's, when the State of Israel abolished the 1934 British mandatory ad valorem taxation system in order to establish a more stable tax base for local authorities during the period of highly volatile property prices. As the Arnona tax system is not commonly used elsewhere and its studies are infrequent, little is known about its advantages and disadvantages. In particular, the question remains whether the amount of taxes, collected by this system, actually reflects market realities and societal justice, while encouraging local authorities to protect the environment. The present study aims to answer this question, by analyzing the most recent fiscal data on local authorities in Israel, published in 2017. As the study reveals, there appears to be no significant correlation between the amount of Arnona taxes collected, on the one hand, and the market values of properties and environmental conditions in the local authorities, on the other, while the link between the amount of Arnona taxes and socio-economic status of local residents appears to be weak. As an efficient system of property taxation should be equitable, reflect market realities, and help to protect the environment, our conclusion is that the taxation system in question does not meet these requirements and should ultimately be modified or replaced by a more efficient taxation approach. The study’s results might be informative for policy-makers in countries and regions, in which traditional ad valorem taxation system might be difficult to implement due to a limited number of comparable properties transactions, or due to rapidly changing market values of properties, thus leading to a need of choosing an appropriate taxation alternative.