Bank of Israel study: Tax benefits for outlying areas ineffective

The tax benefits granted by the state to communities in outlying areas are ineffective and unsuccessful in convincing people to move to those areas, according to a new Bank of Israel study.

The Knesset recently increased the number of communities eligible for income tax benefits from 182 to 430, starting in 2016, at an annual cost of NIS 1.2 billion. Income tax benefits were granted to certain communities in recent years for the purpose of attracting well-off people to economically disadvantaged communities, strengthening the outlying areas, and encouraging people to move near the borders. In 2003, incidentally, the number of communities eligible for the benefits was reduced from 460 to 165.

The Bank of Israel states, “The results cast doubt on the efficacy of the locality-based credits as a tool for attracting migration to the periphery: only about 10% of the credits in 2008 were given to salaried employees who moved to beneficiary localities, and only some of those employees moved due to the benefit. About three-quarters of the credits were given to veteran residents who probably would not have moved away from their localities even had they not received the benefit… About 12% of the credits were given to employees who doubtfully lived in the beneficiary localities. These figures indicate that the tax credits are not a focused policy tool and that only a small percentage of the expenditure on it serves its main purpose – to attract population groups with high earning potential to the periphery.”

The Bank of Israel therefore concludes that “… locality-based income tax credits in Israel are not an efficient policy tool for attracting people to move to the periphery.” In order to isolate the effect of the change on population movement to and from the beneficiary communities, another analysis in the study focused on Jewish communities in the north whose benefit was changed only once during the period involved, in 2003. According to the study, “Comparing the localities where the benefit was expanded or cancelled to similar localities that did not receive any benefit shows that the change in credits helped achieve a slight increase in incoming migration to the beneficiary localities, but did not affect the volume of departing migration. The exceptions are Tzfat and Tiberias, which lost stronger population groups after their credits were cancelled, but it seems that there were specific local causes for this.”

The Bank of Israel recommends that the government and the Knesset consider other means of encouraging population movement to the outlying areas: “… expanding the benefit in 2016 is not expected to have a significant impact on outgoing migration from the localities where the benefit was expanded, but it is likely that incoming migration to them will increase slightly and will include a slightly higher rate of people with high earning potential. It is therefore worthwhile for the Knesset and the government to consider using alternative means in the future, such as investment in upgrading services in the target communities, and examine the possibility of limiting the duration and total of the accumulated benefit to residents who migrate to the beneficiary localities.”