The state slaughters its cash cow: Where will the money come from for the war?

200 billion shekels - the hypothetical amount the war is estimated to cost. Now, with the launch of Operation "Northern Arrows," the cost of the war will at least double. Where will the money come from?

The Treasury is currently finalizing the tax booklet for the 2025 budget. Among other measures: an additional 3% income tax on high earners - which now also applies to profit from the sale of residential units, at any amount; purchase tax brackets; exemption from appreciation tax; and exemption from income tax on rental income will all be frozen. 

This is not new; real estate has always been an excellent source of government revenue. Only recently, the Tax Authority director, attorney Shai Aharonovitch, revealed that tax revenues now exceed 24 billion shekels above the forecasts given at the beginning of the tax year. He did not say this explicitly, but everyone understands that the surplus tax revenues are due to the unexpected awakening of the housing market.

Let's assume that more than 60% of the amount we pay for an apartment is taxation going to the state. 

Real estate, as mentioned, has long been a major cash cow for the government, and the dairy farm continues to operate extra hours even during the war. With rising demand and soaring prices, real estate taxation continues to break records every passing year, and today it is at an all-time high, with the awakening noted among investors and foreign residents. 

THE ABSURDITY is that, despite the profits investors bring to the country totalling billions each year, the Tax Authority continues to plan how to increase their tax burden, aiming to drive them away from the market. And who will pay for the deficit that deepens every day the war continues, you ask? Young couples, of course, who will be the first to suffer from the move intended for their benefit. Remember that at the end of 2021, the purchase tax on a second home returned to 8%, after a period when it stood at 5%.

Another example of such a move can be found in the draconian purchase tax, under which poor people who managed to buy cheap agricultural land two decades ago will pay a high fine for lands that never yielded money. This is a disgrace. 

We will also add that the situation of infrastructure and execution companies is very bad, even on the verge of collapse. Precisely on days when they will need them most to rehabilitate thousands of residential buildings, houses, roads, and public buildings in the North, the state burdens them and adds the final straw to the camel's back.  

It is "almost a year since the State of Israel has been at war, and construction and infrastructure contractors are facing a crisis,” Zvika David, the Builders Association's deputy president and the Infrastructure Department's chairman, said. 

“This sector, as you mentioned, is weakening,” he said. “According to BDI data published last May - 350 infrastructure and construction companies have encountered economic difficulties and ceased payments. The more updated data from recent days, which I believe will be published soon, show that it has already exceeded 650." 

THE FACTORS for the crisis speak of border closures and the colossal shortage of workers, alongside rising construction material costs, rampant inflation and funding difficulties, among others. All of these lead the contractors to an impossible situation. Also, the lengthening of the construction time for housing to 35 months compared to 29 months in 2019, as a result of excess bureaucracy complicates the entrepreneurs who, as mentioned, need to cope with high financing costs in the current interest rate environment. 

To all this, we add the costs of workers that have changed significantly – as workers' wages have skyrocketed. If before October 7, the average salary of an employee stood at about NIS 7,000, today the salary jumped to an average of NIS 17,000, due to the severe labor shortage.

In the end, it is possible to illustrate the term "leading axle of the economy" in data: real investments in construction constitute 13% of GDP, with 52% in residential construction, 30% in non-residential construction, and 18% in infrastructure. According to the Economic Union of Builders, in the nine months from the outbreak of the war until mid-year, the decline in industrial activity of the sector contributed to a relative loss of 4.4% of production compared to the trend before the war. 

All this is happening precisely when there are sources of funding in the banking system to support the sector.

"If we lose the builders, then what will happen here? Who will build and who will do the work – CEO Ramy or the mayor of Hod Hasharon?" Yulia Melinovsky of the Israel Beytenu (Israel Our Home) Party said a week ago at the Knesset Interior Committee – and there is nothing to add to this.

So where will the money come from? You already know.

I RECENTLY met with Tax Authority Director Shay Aharonovitch at a conference of the Association of Contractors of the Tel Aviv and Central District, held in the resort town of Eilat. He admitted that the real estate sector is ripe for regulation, and that the impact of taxation on the sector is significant and palpable. According to him, over the past 13 years, the government has consistently used real estate taxation in an attempt to shape the housing market.

Regarding the purchase tax, Aharonovitch explained that it is currently a big question mark: whether at the beginning of 2025 the purchase tax on a second home is expected to return to 5%, or whether the current rate will continue for another year or two. 

"There is no government meeting where I do not raise this point with the Finance Minister,” he said. “Currently, there is uncertainty on this issue, as the Finance Committee has been asked to extend the current tax rate for another two years. This uncertainty may lead to a freeze in the market, pending a decision. The Tax Authority will collect more taxes if the purchase tax is reduced." 

AHARONOVITCH ADDED that the war has led us to increase the deficit. Its cost is estimated to be between 200 billion and 250 billion shekels, mainly on security expenditures. The big problem is not the one-time expense; the economy knows how to recover from a significant and prolonged event. 

"The concern is what will happen next,” he said. “Our goal, as the finance minister stated, is to reach a maximum deficit of 4% in 2025. This year, we will finish with a deficit in the region of 6.8%. The implication is that we need to generate income of about 40 NIS billion because it signals to the world and credit rating companies that Israel has returned to a path of healthy economics. This is done through tax measures." 

However, Aharonovitch noted, "There is currently no intention to increase taxes on the real estate sector. 

There are different ideas, such as reducing the purchase tax and increasing rental tax, which I think is correct but may be perceived as unpopular. We are not talking about canceling the exemption, but those who do receive an exemption will need to report it. Our estimate is that there are NIS 2 billion hidden there. But it is not on the agenda right now; it needs to be discussed."

IN CONCLUSION, the head of the Tax Authority noted that Israel is proving, to our amazement, that the Israeli economy is strong and able to withstand such a traumatic event. "You [contractors and developers], along with the high-tech industry, are the driving force behind the Israeli economy, and we must do everything we can to support you."

These are undoubtedly nice words, but will the government manage to restrain itself this time from causing damage to the real estate sector? The answer is likely no. The right hand doesn’t know what the left hand is doing, and there’s no coordination in the government: different ministries give conflicting instructions. For example, Israel Roads issued a letter granting compensation to contractors, and kudos to them for that, but Israel Railways, on the other hand, hasn’t issued anything. 

Gil Cohen, Senior Manager of Interaction and Operations at Israel Railways, stated: "On the one hand, we understand the situation, but on the other, we haven’t received any clear or comprehensive guidance. The Transportation Ministry sets our timelines, but we don’t have the budget for compensation nor instructions on how to implement it. Our control companies were appointed to find a solution for the matter with Israel Roads."

THERE ARE  no workers, and new corporations established by business people are collapsing. The battle continues not only against external enemies but also within the real estate industry. David Olnick, from Olnick Earthmoving and Roadworks, founded such a manpower corporation. 

"We are considered MELACH – an emergency economy, so our equipment, infrastructure contractors, has been mobilized since October 7th until today,” he said. “We are also the engine of the economy, and a quarter of my employees, including my own children, are serving in the reserves. That being said, I must say this: if there won’t be blue-and-white contractors in Israel, we have no right to exist as a country. We are the contractors who move neighborhoods and roads, and the treasury officials don’t understand that.

"I traveled to India and returned, opened a corporation to save my company, and I still can’t recruit workers. To give an example: a welder who used to cost NIS 500 a day now costs NIS 1,600 a day. Moldovan workers who once asked for NIS 500 a day now want 1,000. There are no tilers at all in the market,” Olnick lamented.

“This is how things have been since the start of the war, and we are still working under old contracts with the government – everything has become more expensive, but there’s no reflection of that in the contracts."