Reforming the taxation of housing in Israel
This paper examines the taxation of housing in Israel, and proposes a set of reforms
to improve the efficiency and fairness of the current system. Israel’s housing tax
system faces similar problems to those of many other OECD countries. In particular,
a bias arises in favour of owner-occupied property relative to rented property due
to the non-taxation of imputed rents and most capital gains. That said, unlike many
OECD countries, Israel taxes some owner-occupied capital gains (above a generous threshold)
and generally does not allow mortgage interest relief for owner-occupied properties,
reducing the extent of the distortion more than in many countries. As with most OECD
countries, Israel levies highly distortionary transaction taxes, although a zero-rate
band significantly limits the number of owner-occupied house purchases subject to
the tax. Additionally, Israel’s recurrent property tax (the Arnona) faces a number
of design problems, while the tax rules for rental income are complex and subject
to significant tax evasion. To address these concerns, a reform package is proposed
that involves a gradual and broadly revenue-neutral shift away from transaction taxes
towards recurrent taxation of residential property, via increases in both the recurrent
property tax and rental income taxation. The redesign of the recurrent property tax
from an area-based to a market value-based tax is also proposed, as are a number of
more technical reforms.
Published on July 16, 2021
In series:OECD Taxation Working Papersview more titles