הקורונה והארנונה: משבר הקורונה כזרז לרפורמה במשק הכספי של הרשויות המקומיות בישראל

Non-residential property tax revenues in Israel (arnona) are the basis of fiscal strength among the country’s local authorities. However, the combination of high demand for housing and lower demand for office and retail space raise doubts about the sustainability of the present model of local government finance. This model produces an oversupply of land allocated for businesses and exacerbates inter-municipal fiscaldis parities. The COVID-19 crisis further exposed the model's vulnerability to the rise ofonline shopping and remote work. This paper examines the need for change in local government finance; particularly, shifting some of the property tax burden from business to residential properties. Based on interviews with stakeholders and experts, it also explores reform alternatives and barriers to their implementation. Financial data reveal that a diminishing ability to rely on non-residential property taxes has a differential impact: the cities that are the most negatively affected have medium levels of fiscal strength and peripherality. Rather than advancing new ideas for reform,interviewees emphasized barriers to the implementation of any change, largely because of the inability to predict the identity of winners and losers; the former are likely to remain silent while the latter will protest, causing decision makers to pay a political price.Over dependence of local authorities on property taxes paid by businesses is particularly challenging in Israel because these taxes are non-ad valorem and are usually paid by renters rather than property owners. The paper discusses reform alternatives, including a transition to local value added, income, or ad valorem property taxes, all characterized by high barriers to implementation. In fact, the first two compete with central state tax bases. Promoting revenue-generating municipal enterprises and establishing value-capture bases for funding municipal services also have a limited potential, as do redistribution mechanisms, such as increased central state grants,redistribution of local government tax revenues, or the establishment of upper-tierregional governments. Hence, the feasible alternatives involve a more conservative approach of modifying the existing property tax system. Such modifications include addressing technical distortions, gradually narrowing the gap between residential and non-residential property tax rates, levying part of the property tax on owners rather than on renters, and basing part of the tax levied on businesses on profits rather than on floor space and other property attributes.Israel’s multiparty coalition government structure poses serious challenges for implementing far-reaching comprehensive reforms. Hence, it is recommended to focus on small, incremental, politically feasible steps. The alternative to making incremental changes in a fundamentally flawed system involves striving for a broad reform; this is contingent on seizing rare political “windows of opportunity.” These may consist of an emergency crisis context coupled with a stable government. This combination can facilitate a fundamental reduction in local government’s over-dependence on business taxes and making housing more attractive from the point of view of local finance.