The bill for the war years: Tax Authority prepares for a multi-billion deficit in 2027

The revenues of the State of Israel in 2026 are deceptive. After almost three years of war, a surge in defense spending, credit rating downgrades, and a sharp rise in debt, tax collection continues to surprise on the upside. "Collection this year is good, very good, and surprisingly positive," said Tax Authority Director Shay Aharonovich yesterday, "but expenses are also surprising," he immediately qualified.

It is evident that he is not worried about the present — he estimated that even if the coming months are weaker, the state is expected to meet the annual revenue target of about 555 billion shekels — but rather about what is to come. The remarks made by Aharonovich at the annual Duns 100 forum for senior tax industry executives, held by Dun & Bradstreet, show how dangerous it would be to conclude that the budget problem is behind us. In a conversation with Calcalist, Aharonovich expanded on the concept behind the data, speaking less about 2026 and more about 2027 and 2028. The message is clear: strong revenues this year do not eliminate the need to find new sources in the coming years — in the amount of billions of shekels.

Injecting funds into the Compensation Fund

The most prominent example is the Compensation Fund. Since the outbreak of the war, the fund has spent billions of shekels, and in 2024 and 2025, all purchase tax revenues were directed to it. At the forum, Aharonovich said that only a few billion shekels remain in it and that "this story is over": most likely, as early as next year, it will be necessary to inject money into it from the state budget. In 2026, allocations from purchase tax to the fund decreased again to 25%.

In a conversation with Calcalist, he estimated that about 4 billion shekels remain in the fund and that in 2026, no additional extraordinary measures will likely be needed. But towards 2027, it will be necessary to re-examine directing 75% and even 100% of the purchase tax to the fund. The purchase tax itself, according to him, yields about 7–8 billion shekels even in a weak year. And this is exactly where the good news about collection meets fiscal reality. Diverting the purchase tax to the Compensation Fund does not create new money. It simply takes income currently used by the budget and transfers it to another purpose. At the same time, defense spending is not expected to return to pre-war levels, and some of the measures that increased state revenues in recent years were temporary.

The carrot and the stick for Israeli startups

Therefore, Aharonovich is already opening the toolbox for the 2027 budget. What alternatives are there? He does not support raising corporate tax because of the potential damage to growth. He is also not enthusiastic about another increase in VAT and explained that there is a limit to how much tax the public can pay on consumption. Instead, he suggests examining taxes and distortions whose economic impact is smaller: returning property tax on land, a mileage tax on all vehicles, returning the tax on sugary drinks and disposable utensils, and reducing existing exemptions.

Property tax on land is perhaps the most important example. Aharonovich mentioned that the proposal has already passed significant legislative stages and reached the Finance Committee, but was blocked when the war forced the government to reduce the Arrangements Law. From his point of view, this is the type of tax that should be brought back to the table, mainly because it harms growth less than an additional increase in direct taxation.

The most interesting part of the conversation with Calcalist concerns high-tech. Aharonovich says that according to the data held by the authority, today more than 50% of new startup companies are registered in the USA, whereas three or four years ago most companies were registered in Israel. From his point of view, this is a change that cannot be ignored.

Here, Aharonovich's tax concept is sharpened. On one hand, he offers a "carrot": to examine a benefit similar to the American QSBS, which grants tax benefits to investors who establish young companies. On the other hand, he reveals that a "stick" has also already been proposed to the Tax Authority: to condition the tax benefit for employees on options under Section 102 of the Income Tax Ordinance on the company being registered in Israel. This is not a marginal proposal. Section 102 is one of the central mechanisms through which high-tech companies in Israel reward employees with options and shares. Using it as an incentive for company registration in Israel could turn it from an employee taxation tool into an industrial policy tool.