Tax revenues have reached record highs in recent years; however, government spending has also surged due to the costs of the war. Government officials recognize that the defense budget will remain substantial, together with high interest payments on the national debt and an urgent need to increase civilian spending.
The government’s debt-to-GDP ratio has climbed from about 60% on the eve of the war to 68.5% at the end of 2025. It is not expected to decline, even though the current year may end with a deficit lower than originally projected. Nevertheless, Israel has assured credit rating agencies and investors that this ratio will decrease in the coming years. This commitment necessitates fiscal adjustments, which could be achieved through spending cuts, an increase in debt and the deficit, or the imposition of new taxes.
Consequently, joint teams from the Ministry of Finance and the Israel Tax Authority have been working in recent months on plans designed to boost state revenues and adapt the tax system to shifts within the Israeli economy. "Globes" outlines the primary proposals currently under consideration and assesses the likelihood of their implementation.
The popular measure
Lower labor taxes in exchange for the elimination of tax credit points
A major tax reform is currently being planned, centered on reducing the marginal tax rate for employees while simultaneously eliminating various tax credit points. Senior officials at the Ministry of Finance and the Israel Tax Authority have already discussed this publicly. This could entail a further widening of income tax brackets, to which health insurance contributions and National Insurance payments are also added.
This popular measure may be bundled with less popular steps, such as the cancellation of specific income tax credit points. Public statements have already highlighted geographic-based tax credits, as well as credits for parents (costing NIS 14.4 billion annually) and numerous other tax benefits.
Bottom line: A structural reform that would ostensibly provide relief to a large segment of the public yet is likely to face opposition from interest groups that currently benefit from these tax breaks.
A response to the AI era
Property tax, a "Netflix tax," and luxury goods tax
The Ministry of Finance anticipates that the share of state revenue derived from labor-related taxes will decline in the coming years, driven by shifts associated with the AI era. Projections suggest, at least for a certain period, a reduction in labor tax receipts, partly due to the layoffs the economy will undergo.
Consequently, a recent internal review by the Chief Economist’s Division has recommended adjustments to the tax system designed to increase the proportion of revenue generated from capital taxation relative to labor taxation.
Among these proposed measures, a property tax on vacant land is set to be put back on the table. This tax was included in the previous Economics Arrangements bill but was dropped during the legislative process. At the time, the Ministry of Finance estimated that, once fully implemented, the tax could produce NIS 9.5 billion annually for the state coffers. Although agricultural land was exempted during the legislative phase, the proposal faced political opposition, including from within the coalition, and was ultimately abandoned.
The review also recommended considering the taxation of luxury goods, as well as a "Netflix tax" - a measure requiring international companies to collect VAT from Israeli consumers. A similar proposal from 2023 estimated that the tax would produce NIS 500 million annually for the state treasury.
Bottom line: Implementing a property tax is likely to be a politically challenging task, regardless of the composition of the incoming government. A "Netflix tax" could also face opposition from the US, as has happened in the past.
Tech in the crosshairs
Higher taxes on options and secondary deals
In recent years, the tech sector has established itself as the economy’s main engine, driving the bulk of Israel’s growth during the war period. A joint team from the Ministry of Finance and the Israel Tax Authority is discussing a proposal in which tech employees who do not exercise their company-granted options immediately on conclusion of the vesting period would be subject to a 30% tax rate on the eventual sale of the shares, thereby losing eligibility for the 25% reduced tax rate currently provided for under existing law.
This proposal faces opposition not only from the industry itself but also from within the Ministry of Finance.
It is possible that this measure could be bundled with an expansion of income tax brackets, increasing employees' net take-home pay, in an effort to soften the blow. In any event, Minister of Finance Bezalel Smotrich has announced his opposition to such a move. The matter will likely be referred to the government for a final decision. Furthermore, drawing a lesson from the Wiz deal, the Israel Tax Authority is advancing an initiative whereby, instead of paying billions of shekels in taxes upon the transfer of intellectual property from Israel to the US, companies would reach an arrangement with the Tax Authority. Under this arrangement, the IP and the product’s sales rights would be shared according to a pre-established agreement.
Also in the crosshairs are secondary deals, in which investors buy shares from existing shareholders. While the industry views the proceeds as capital gains, the Tax Authority classifies them as employment income. The resulting gap in tax collection is estimated at hundreds of millions of shekels.
Bottom line: These measures, which require legislation, including the taxation of unexercised options, are also facing internal opposition from some senior officials within the Ministry of Finance.
Pensions
Will the mandatory contribution requirement be abolished?
A separate task force is working on far-reaching changes to pensions and savings. The Ministry of Finance sees the tax pensions benefit as the biggest benefit provided by the state, with an annual cost of NIS 31 billion. However, there are several potential paths forward. Senior officials at the Ministry of Finance, joined by representatives from the National Economic Council, are pushing to either cut the mandatory pension contribution requirement or abolish it entirely for those under 40, to boost consumer spending.
Conversely, others argue against reducing the mandatory contributions, suggesting instead a significant cut to associated tax benefits, reasoning that since the contributions are legally mandated, such incentives are unnecessary. Smotrich recently boasted that he had blocked initiatives to curtail the tax exemptions granted for pensions. The matter will ultimately be decided by the next government.
Another exemption that resurfaces every few years concerns the taxation of advanced study funds. This tax break costs the state about NIS 10 billion annually. However, the chances of passing it are low. It is often used as a bargaining chip in talks with the Histadrut General Federation of Labor, which has turned the issue into a rallying cry and a symbol. Consequently, it is unlikely to be the centerpiece of the planned tax measures, given the many other issues on the table.
In the realm of savings, a plan is already on the table: the "arbitrage reform." This initiative aims to level the playing field by eliminating tax distortions across various savings products, specifically investment provident funds, savings insurance policies, and mutual funds. Existing tax exemptions would be abolished, replaced by a blanket exemption applicable to all these products, capped at NIS 200,000. Amit Gal, the Commissioner of Capital Markets, Insurance and Savings, has warned that this reform could actually drive up costs for consumers rather than fostering competition. Nevertheless, the current Minister of Finance has chosen to advance the reform, though its final enactment into law will be decided by the next government.
Bottom line: Any move to curtail tax exemptions related to pensions and advanced study funds is likely to face opposition from the Histadrut.
The question of feasibility
It is doubtful whether the Ministry of Finance will succeed in advancing such an extensive list of reforms. New governments typically adopt a comprehensive Economic Arrangements Law on taking office. Therefore, given the economic challenges and the arrival of a new government, it is reasonable to expect a relatively broad legislative package. This approach will encounter the familiar legal hurdles associated with legislation designed to directly support the state budget, rather than serving as a standalone vehicle for expedited lawmaking.
To circumvent this difficulty, it is possible, as has been done in the past, that a dedicated Knesset committee will be established to address financial reforms. This committee could handle similar legislation that is either excluded from the Economic Arrangements Law or dropped from it during the legislative process.
However, as is typical with every budget, the strategy will likely involve bundling harsh austerity measures with various benefits. Even so, the Ministry of Finance will need to be selective about which battles to fight as many of these initiatives are bound to face political, substantive, or ideological opposition that will be shaped by the composition of the next government and the specific ministers appointed. Another challenge lies in the influence of the Budget Department: since the current Budget Director, Maharan Frozenfar, was appointed by the incumbent minister. His working relationship and level of trust with politicians would be put to the test should a different government take office.
Published by Globes, Israel business news - en.globes.co.il - on October 22, 2026.
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