Israel Tax Authority Warns of Fiscal Pressures and Upcoming Budgetary Challenges
Israel's Tax Authority warns of severe budgetary pressures for 2027 and 2028 driven by defense spending, as officials debate housing market corrections, rental taxes, and urban renewal challenges.
Israel's tax authorities are bracing for significant fiscal pressures in the coming years, driven largely by mounting defense expenditures. Speaking at the Urban Renewal Summit 2026, Tax Authority Director Shay Aharonovich warned that 2027 and 2028 will present severe budgetary challenges that could necessitate difficult revenue-raising measures.
Budgetary Pressures and Shadow Economy
Aharonovich emphasized that the state must find fresh revenue streams to cope with massive state expenses, particularly defense, without relying solely on conventional taxation. "My goal is not to resort to the simple things we know, but to pass legislation and target areas that we believe can be taxed but are currently untaxed or unrealistically taxed, while continuing to fight the shadow economy," he stated. He added that a newly formed government will need to pass a state budget within three and a half months, making public discourse essential.
Addressing the proposed tax on airline flights, Aharonovich defended the initiative as an environmental necessity. He noted that while international aviation fuel agreements exempt jet fuel from direct taxation, many nations apply indirect levies. Furthermore, he noted that the rental market remains a major stronghold of unreported shadow capital. The Tax Authority intends to pursue mandatory reporting on all rental income, even for properties qualifying for exemptions, a move projected to generate at least 1.5 billion NIS for state coffers.
Housing Market and Construction Industry
Ministry of Construction and Housing CEO Yehuda Morgenstern weighed in on the residential market, arguing that consumers are fatigued by marketing gimmicks and are waiting for clear price corrections. Morgenstern stressed that developers must adjust pricing downwards to reflect current market realities. Once buyers witness a stable 10% to 15% drop in housing prices, market activity will rebound, enabling the state to price land more competitively.
Meanwhile, Dan Kachanovsky, CEO of the Real Estate Center, sharply criticized the government for shifting earthquake and missile fortification responsibilities onto private developers and landowners. Kachanovsky pointed out that with Tama 38 expiring in May 2026, major cities such as Jerusalem, Haifa, Bat Yam, Ramat Gan, and Rishon LeZion still lack definitive replacement frameworks, leading to a steep decline in building permit applications.
