"The 2027-2028 budget will be harsh. We do not foresee any extraordinary growth. We continue to fight on seven fronts, and none of the politicians are promising to bring these fronts to an end, partly because it is unclear if a way out even exists," Israel Tax Authority head Shay Aharonovich warned the Chamber of Tax Consultants annual conference.
Aharonovich says high defense spending will persist in the coming years, putting a heavy burden on the state budget. "The US President is essentially saying, 'Choose one of these candidates, because with him, I will go to war against Iran again.' This means a NIS 200-billion defense budget, not just for 2027, but for 2028 too. There is completely unrestrained spending reservists, as well as the procurement of Apache helicopters - purchases the Minister of Minister opposed, yet no one dares to challenge the Ministry of Defense."
These remarks follow pre-election promises by politicians that taxes would not be raised in the next budget. However, Aharonovich says that, given the state’s financing requirements, it will be difficult to avoid new tax measures. The Israel Tax Authority and the Ministry of Finance are currently examining a series of measures designed to increase state revenue, while attempting to minimize the impact on economic growth and avoid raising VAT or income tax.
Promoting a reduction in cash usage
One of the measures being promoted by Aharonovich is a reduction in the use of cash, which he claims fuels the "black economy" (unreported economic activity). Among other things, he proposes abolishing the NIS 200 banknote, and potentially even considering the complete elimination of cash in Israel.
"The Bank of Israel opposes the abolition of the NIS 200 banknote. We saw what happened in the case of the Mayor of Kfar Saba - all those NIS 200 notes seized in a safe. We need to abolish this banknote, and perhaps even cash altogether," insists.
According to him, eliminating the use of cash could significantly boost state tax revenues. "There is a disagreement between us and the Bank of Israel. I can tell you that if the use of cash in Israel were abolished tomorrow morning, it could result in NIS 20-30 billion in tax collection. The Bank of Israel opposes this."
Following Aharonovich’s remarks, the Bank of Israel responded, effectively dampening the proposal: "The Bank of Israel wishes to inform the public that, under the law, the authority to abolish banknotes rests solely with the Governor of the Bank of Israel. To date, no professional justification has been presented to the Governor that would warrant the abolition of any specific banknote. In no country worldwide has cash been abolished in a sweeping manner. Therefore, the Governor of the Bank of Israel does not intend to exercise his authority to abolish any banknote or to alter the mix of banknotes currently in circulation," the statement read.
Considering stricter requirements for the Trapped Profits reform
Another measure being examined by the Israel Tax Authority involves tightening the requirements under the "trapped profits" reform. While heads of professional associations are calling for the reform to be scrapped or softened, Aharonovich clarified that the Authority is actually considering increasing the percentage of profits that companies are required to distribute annually, from the current 6% to 8%.
"We will need to take tough measures. This could include raising the distribution requirement under the trapped profits legislation to 8%, rather than the current 6%, because the state lacks funds," he said. "There is no getting around it: 2027 and 2028 will be difficult years - at least until the Middle East reaches a new equilibrium, allowing the defense budget to return to a more restrained level than it is today."
The reform, which took effect in January 2025 as part of the Economic Arrangements Law, is designed to limit the ability of high-income earners to defer tax payments by accumulating profits within companies under their control. Under this reform, closely held companies and "wallet companies" (personal holding companies) are required to distribute a portion of their accumulated profits or pay tax on them. For 2025, a temporary provision mandated the distribution of 5% of accumulated profits, while from 2026 onward, this distribution rate increased to 6%. The reform sparked fierce opposition from some economic sectors, with critics arguing it would harm companies and investments. Nevertheless, it was approved, and since coming into effect, it has generated tens of billions of shekels in state revenues.
Leaders of professional associations, including Chamber of Tax Consultants president Yaron Gindi, continue to call for the reform’s repeal, or at the very least, its softening. Aharonovich, for his part, clarified that repealing the reform is unlikely, given the state’s budgetary situation.
"If there is no other choice, we will increase the requirements within the framework of the reform. If the state needs money, what are we supposed to do? Instead of distributing 6%, let them distribute 8%," he said. "If they decide to scrap the reform, the money will have to come from somewhere else. We are not heading into a period of surpluses - quite the opposite."
However, Aharonovich noted that the Tax Authority intends to examine the reform’s impact on the economy, and that adjustments may be made down the line. "I am not convinced that it harms the economy to the extent that opponents claim; we need to wait and see. It is still too early to determine whether it is hindering growth as we need a longer-term perspective. As promised, we will review the situation in 2027, and it is quite possible that we will tweak the measures. No legislation is perfect, and this is not perfect."
Property tax on vacant land may make a comeback
Another measure being considered for the 2027 budget is the reinstatement of a property tax on vacant land - a levy that was abolished in the early 2000s. Aharonovich expressed his support for the move, arguing that the original decision to scrap the tax was a mistake.
"In my view, the abolition of the property tax in the 2000s was a travesty. A group of people with vested interests got rid of a sound tax," he insists
Aharonovich says the Israel Tax Authority is collaborating with the Ministry of Finance’s Budget Department and the Chief Economist to formulate tax proposals for the upcoming budget. The objective is to identify additional revenue sources to fund defense spending, while minimizing the impact on the general public and economic activity.
"If we don't come up with solutions, we’ll be left with no options, forcing us to raise the VAT, increase marginal tax rates, adjust tax brackets, and so on," he warned. "That is why we are trying to think creatively and find solutions that won't place an undue burden on the public at large."
Aharonovich added that the Ministry of Finance is engaged in intensive work to develop a series of proposals to be presented to the government and the next Minister of Finance. "We need to generate tens of billions, so we have to come up with 'smart' taxes. No one likes taxes, but some options are less damaging to growth and that is what we are looking for," he said.
Aharonovich stresses the aim is to propose alternatives that will enable the state to meet its budgetary requirements while avoiding, as much as possible, broad tax hikes and across-the-board spending cuts. "I need to provide the Ministry of Finance with recommendations on which taxes should be imposed - which ones make sense to implement - to avoid extreme across-the-board cuts (which will happen regardless) and to encourage growth."
Published by Globes, Israel business news - en.globes.co.il - on October 19, 2026.
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