A Property Tax Model for Local Authorities

Local authorities in Israel periodically submit requests to the Ministry of Interior for exceptions or irregular changes in the property taxes they charge residents, which must be approved by the Ministry. In the past, these requests were reviewed without carrying out a comparison between the requesting local authority and similar authorities, and without comparing the local authority’s request to its approved tax rates according to the "balancing grant formula." The latter refers to a grant given by the Ministry to local authorities to help them balance their budget which factors in many parameters. Thus, the Ministry needed a tool to review these requests using fixed, clear and measurable criteria. 

The purpose of the project was to establish a model for comparing local authorities' property taxes in six categories ─ residential, industry, workshops, banks, hotels and land used for other purposes ─ in order to determine a tax rate for each municipality and each one of the six categories, taking into account the differences between them. 
The working assumption was that the comparison of municipal tax rates for residential properties should be done between municipalities whose residents share a similar socio- economic level, whereas the comparison for rates on non-residential properties should be accomplished by comparing adjacent municipalities, or municipalities similarly distant from Israel's main business areas. Such municipalities essentially compete for the same businesses.

A comparison group was defined for each municipality based on the socio-economic strata it belonged to, as defined by the Israeli Central Bureau of Statistics, and its distance from the center of Israel. A median city tax rate was calculated for each group, according to the local authorities' annual reports for 2014. The standard tax rate of each municipality was also taken into account in determining the final permissible tax hike, in accordance with the balancing grant formula.

The model built at ADALYA now serves as a tool for informed decision making by the Ministry of Interior for all requests by municipalities for changes in their municipal taxes.

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