Property taxation in Israel: a non ad valorem approach

The arnona, the system of property taxation in Israel, is a unique form of taxation being based on a property's size (m²) and not on its discrete open market value. The actual use of the property (residential versus non-residential), its location in the municipality, type of property and its age are the determining factors for tax liability. In order to test for equity within the current system, the methodology adopted was to investigate the effect of population size, remoteness and population makeup with respect to some 80 municipalities on the levels of arnona. Although the thresholds of arnona for individual municipalities are approved by a committee of the Knesset, the present analysis indicates that the current differences in per capita amount of arnona collected by local authorities do reflect factors that would normally be expected to influence an ad valorem property tax in a market economy. It is argued that whilst the arnona is an accepted form of local authority property taxation, there are a number of fundamental weaknesses. Its application could be improved by incorporating elements of an ad valorem property tax, which would more fully reflect the socio-economic level of taxpayers and the physical condition of the built environment. However, the arnona, not being based directly on a property's market value should be of interest to countries (e.g. transitional countries of Central and Eastern Europe) who are presently introducing property taxes within an environment where property markets are not as yet fully developed.