Israel Considers Reinstating Vacant Land Property Tax for 2027-2028 Budget
Faced with heavy budgetary challenges for 2027-2028, Israel's Tax Authority and Ministry of Finance are considering reinstating a 1.5% property tax on vacant land to boost housing supply and curb the deficit without broad tax hikes.
Faced with severe budgetary challenges for the 2027-2028 fiscal years, the growing defense budget, and the desire to prevent widespread damage to economic growth, the Israel Tax Authority and the Ministry of Finance are considering new solutions. Central among the measures currently under review is the reinstatement of property tax on vacant land.
Background on Vacant Land Tax
Property tax is an annual levy collected from owners of vacant land, which is land that remains undeveloped or where construction has not yet been completed. In the past, property tax was levied in Israel at a certain percentage of the land's market value each year, until its rate was set to 0% in 2000 as part of a tax system reform. Reinstating property tax has a direct impact on the real estate market, bringing two primary effects.
The first effect is countering land hoarding by developers to incentivize increased housing supply. One of the most severe problems in the Israeli real estate market is the phenomenon of hoarding, where private landowners, contracting companies, and developers hold onto available land in the center of the country without rushing to build or sell it, anticipating continued price rises.
When a significant annual property tax exists, holding vacant land becomes a heavy cash flow burden. The tax exerts economic pressure on owners to initiate processes: starting construction, populating, or selling the land to a developer who will build on it promptly. For the Tax Authority and the Ministry of Finance, this is a regulatory tool that can release supply bottlenecks and increase construction volumes.
The second effect is a stable revenue source for the state treasury. Unlike transaction taxes, such as betterment tax or purchase tax, which depend on market transaction volumes, property tax is a fixed levy collected annually on mere property ownership. Its collection could bring billions of shekels annually into state coffers and help reduce the deficit without requiring broad tax hikes that harm all consumers, such as raising VAT or altering income tax brackets.
Warnings from the Real Estate Sector
Conversely, figures in the real estate sector warn that if the tax is also imposed on contractors' business inventory, meaning land in planning and licensing stages, contractors will roll the additional tax cost onto the final apartment price, potentially leading to further price increases for new apartments.
During the opening panel and a one-on-one discussion at the annual tax conference of the Tax Consultants Chamber in Eilat, attended by hundreds of tax consultants and Tax Authority employees, Tax Authority Director Shay Aharonovich addressed the state's preparations for upcoming budgets and the search for alternative revenue sources that will not burden the general public.
Statements by Shay Aharonovich
Aharonovich noted that the 2027-2028 budget years are expected to be particularly challenging, and that the Tax Authority, alongside the Chief Economist and the Budget Department at the Ministry of Finance, is preparing plans ahead of time so that future taxation is done smartly and thoughtfully. As part of exploring solutions, the Tax Authority director revealed that the possibility of reinstating property tax on real estate is being examined, while fiercely criticizing its past abolition:
"You said 'shake off the dust' - in my opinion, the abolition of property tax in the 2000s was an injustice; a group of interest-driven people at the time canceled a good tax. If we don't think about solutions, we will face a broken vessel, and then they will have to raise VAT by another percentage and another marginal tax, brackets, and so on. So we are trying to think originally and find solutions that will not burden the general public."
Aharonovich emphasized that the goal is to present a comprehensive, formulated taxation plan to the Minister of Finance and the government, which will prevent drastic measures that could harm economic growth: "Nobody likes taxes, but there are things that hurt growth less, and therefore we want to look for that. There is very intensive work in the Ministry of Finance together with the Budget Department, trying to bring a booklet of proposals to put to the Minister of Finance... The goal is to put them on the table for the government and the next Minister of Finance to avoid hysterical measures like raising taxes or cuts."
