Policy Studies

No. 34 May 1998

Summary of Policy Study

“ISRAEL'S PROPERTY TAX AND COMPENSATION FUND”

by Ehud Menirav

Israel needs a Howard Jarvis, the curmudgeonly Californian who wrote Proposition 13, the state initiative that limits property taxes to 1 percent of a property's market value. Despite the vigorous opposition of every vested interest in the state, Proposition 13 passed by an overwhelming two-thirds majority vote on June 6, 1978. Proposition 13 ignited a tax revolt across the 50 American states, producing sharp cuts in property, sales, and income taxes.

Menirav's rigorous analysis demonstrates that Israel's central government property tax, as currently applied, is discriminatory and unjust. It fosters distortions and is administered perniciously. It infringes on citizens' disposable income because its rate is high and does not correspond to citizens' ability to pay. Its incidence does not correspond to economic activity and it leads to endless friction between the tax authorities and the citizens. It inflates the cost of construction and, therefore, the prices of already too-expensive dwellings and industrial buildings. It distorts countrywide land allocation, reduces the tradability of land, and leaves less land available for building. It infringes on landowners' property rights. And, if these problems were not bad enough, it disproportionately hits lower-income households. It is seriously regressive.

Israel's central government property tax cannot be reformed or fixed. It can only be eliminated. Its elimination will dramatically improve the efficiency of the country's land and construction markets, help to reduce government spending, and facilitate the process of privatizing state-owned land -- the government still owns 93 percent of all the land in the country.

Will Israel's Howard Jarvis please stand up!

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