A central government legislative proposal intended to generate over NIS 9 billion in national income from taxes is in jeopardy after two coalition parties, Otzma Yehudit and Agudat Yisrael, threatened on Monday to vote against, each other for separate reasons.
Since the bill is a tax reform, for it to apply for 2025, it must pass into law before the end of 2024.
If the bill does not pass in time, the government will face a significant gap in income for its 2025 budget, since the massive sum joins a second bill that will not pass on time, which was expected to generate over NIS 4b. in income.
In this scenario, it is unclear how the Finance Ministry will address a NIS 13b. gap. Legally, if the 2025 budget does not pass by the end of March, the government will automatically fall and an election will be called.
Otzma Yehudit on Monday repeated an earlier threat to vote against budget-related bills due to expected budget cuts in the National Security Ministry, led by Otzma chairman Itamar Ben-Gvir.
Ben-Gvir has demanded his ministry be exempt from planned budget cuts across the board, which were made necessary by the immense costs of the war.
A spokesperson for the minister said on Monday that the cut would “force the closure of police stations, shrink first-response teams, and damage the activity of Fire and Rescue Service volunteers.”
The Police noted, in a rare statement attacking the Finance Ministry, that the ministry froze funds allocated for a “new structure” for the Yamam Counterterrorism Unit. The Finance Ministry responded that the project was actually halted at the request of the police.
This is not the first clash between the two ministries. Ben-Gvir and Finance Minister Bezalel Smotrich fought last week on the unit’s budget. Smotrich announced on Wednesday that the government and police agreed on a 35% pay rise for Yamam officers, along with a package of benefits.
Ben-Gvir called the move a “feeble spin,” and argued that Smotrich was recycling an earlier agreement just so he could deflect criticism.
The Hamodia newspaper, associated with Agudat Yisrael, the hassidic faction inside the haredi (ultra-Orthodox) United Torah Judaism Party, reported on Monday that Aguda would not support any budget-related bills until an agreement is reached for a new bill to regulate haredi IDF service.
Netanyahu 'promised to resolve the draft issue'
A spokesperson for UTJ leader Housing Minister Yitzhak Goldknopf said Prime Minister Benjamin Netanyahu had promised to resolve the draft issue prior to the budget.
The coalition has 68 members. If Otzma’s six MKs and Agudat Yisrael’s three MKs vote against the bill, the coalition would lose its majority.
The aim of the legislative proposal is to close a loophole that enables certain companies to avoid paying taxes on “trapped profits,” profits that are accumulated in companies that have not been reinvested or distributed as dividends.Today, companies pay a 23% corporate tax on these profits; by leaving them within the company, these companies avoid paying an additional 33% tax once it becomes income.
The Finance Ministry’s original proposal set a new tax of 2% annually on all trapped profits. Over the course of the discussions in the Knesset Finance Committee, an alternative track was added, whereby the tax could be replaced by a dividend distribution, at first of 5% of the accumulated amount, and then at 6% from 2026 onwards. This incentivizes companies to pay out dividends in 2025, which would then be taxed 33% and create state income.
According to Finance Ministry estimates, the new tax will generate NIS 9.25b. in income for 2025, and then NIS 4.35b. every year from 2026 onwards. The legislation is the largest reform accompanying the 2025 budget proposal.