Israel’s ‘Third Apartment Tax’ – The Law That Died Before It Was Born – Lives On

third apartment tax
(Hadas Parush/Flash90)

BY YISRAEL HERSHKOWITZ

Israel’s finance minister, waging a fierce battle against apartment speculators, in an attempt to bring down housing prices, sought to impose a tax on those who own three or more apartments. The law crashed before it even took off. How, then, is it that the law’s objective was achieved?

This was not the first time in Israeli history that the High Court of Justice (Beit Mishpat Gavo’ah LeTzedek, aka, Bagatz) annulled a law passed by the Knesset. But it was the first time that it killed a bill not because of its “unconstitutional” content, but simply because of technical flaws in the legislative process.

In recent years, many controversial Knesset laws have been put to the test of the High Court. Any group that opposed a law but could not succeed in preventing the required number of MKs from voting in its favor simply opened another front — in the High Court. The power-hungry judges, for their part, were happy to repeatedly scrutinize duly enacted laws and probe the extent of their legality. Thus were several laws that had passed a majority vote of popularly elected legislators sent to the ravenous shredder of the High Court of Justice. It is not clear whence the judges sitting there draw their unlimited power, making decisions that are final and indisputable.

The bill under discussion here is popularly known as the Third Apartment Tax. Its invalidation is a major blow to Finance Minister Moshe Kachlon, who has declared war on “apartment investors.” He was not deterred, however, in his avowed objective of lowering apartment prices in Israel, and continued to seek out ways to reach this goal with which he has become identified more than anything else.

What is particularly interesting in this case is that although the law failed, its spirit lives on. Hundreds and thousands of bills over the years have been submitted in the Knesset but, for one reason or another, never made it to the finish line, leaving only a weak echo in the Knesset archives among the thick, dusty volumes of protocols.

But this one was different. The Third Apartment Tax bill has managed to make history, becoming even more influential in some ways than genuine, duly-passed Knesset laws. Consider, for instance, the recent law forbidding businesses from opening on Shabbos. The Bagatz managed to scrutinize, analyze and interpret its words to the point that they were emptied of all content. For this reason, the chareidi parties are now scrambling to pass a new bill that will plug the loopholes in the current law. But with the Third Apartment Law, the opposite process has taken place: Though it was annulled, apartment prices, for the first time in over a decade, have actually stopped climbing — partly due, no doubt, to other dramatic measures initiated by Kachlon. The graphs of housing costs, which had grown accustomed only to climbing, have apparently reached their peak and begun taking a downward turn.

third apartment tax
Moshe Kahlon, finance minsiter and leader of the Kulanu party. (Miriam Alster/Flash90)

The Technicalities

It was 7:05 on Thursday morning, back on Jan. 5, 2017. Four coalition-party members of Knesset serving on the Finance Committee, including Committee Chairman Rabbi Moshe Gafni (United Torah Judaism), raised their hands to pass the final version of the Third Apartment Tax law. It was the final act of a session dealing with a variety of topics that had begun late the night before. The details were inscribed in the minutes of the meeting, and the tired but satisfied MKs headed for home.

The session took place after the new tax was already included in the Arrangements Law, which had already passed its first and second readings in the Knesset and was even approved by the government. The Finance Committee had been asked to add a number of specific changes to the law, to which the opposition objected. Foreseeing their loss, some opposition members chose to absent themselves from the vote, leaving only a few coalition members there to yawn and vote. Nothing new here; this is how it often works. Many laws have been passed in the middle of the night, or in the presence of only a small number of members.

But something here was slightly different, and this changed the picture. Due to the highly controversial nature of the law, and the fact that it was fraught with many political interests, the requested changes were purposely formulated only at the last minute, so that the Finance Committee members were unable to properly review or comment on them.

Opposition members on the committee declared their intention to boycott the session dealing with the Third Apartment Law, in protest of what they saw as an attempted “grab.” Chairman Gafni, however, subject to incessant pressures from the finance minister, insisted on passing the changes during the course of the night — even though he understood and sympathized with the opponents’ arguments. And so the changes to the law were passed, thereby paving the way to the table of the judges of the Bagatz.

Fundamental Issues

The opposition, which almost automatically negates all coalition-sponsored legislation, hurried in this case as well to file suit in the High Court against the bill. The petitioners claimed that the law is unconstitutional; that it infringes upon property rights; that it negates fundamental laws, primarily Basic Law: Human Dignity and Liberty, and others; and that its legislative process was significantly flawed in that the convening of the Finance Committee to pass the final changes was abruptly announced with no advance warning. In addition, the opposition claimed, the final version of the law upon which the committee members were to vote was placed before them only a short time before the session, giving them insufficient time to study it and make their comments.

In the meanwhile, Minister Kachlon was celebrating the passing of the law, declaring it another important milestone on the way to making housing affordable. The Tax Authority began making preparations to collect another tax and, within days, publicized new guidelines on how much will be owed by whom. The Authority also posted on its website a special calculator, enabling apartment owners to figure out how much, if anything, they would have to pay, based on the number of apartments they owned, their value, and other data. A few hundred three-apartment owners even rushed to sell one of their properties, wanting to enjoy the benefits promised to those who did so by a certain date.

And so, it looked like even though the law had not yet taken effect, nothing could stop it. The petition to the High Court was not particularly worrisome, for most of the petitions frequently filed against important laws are rejected — except, of course, those dealing with laws that seek to promote something Jewish. …

But that’s not what happened. Nine months passed, and suddenly, one fine clear day, the Bagatz announced its ruling: “Fundamental flaws marked the legislative process.” Though it did not cancel the law altogether, it rolled back the process retroactively, and the Finance Committee was informed that it would have to vote once again on the final version.

This presented Minister Kachlon with a serious problem. In the months leading up to the High Court’s decision, he had championed the cause of defending the High Court from its many detractors. Despite the public grumbling against the “everything can be adjudicated” approach initiated around the turn of the millennium by then-Supreme Court Chief Justice Aharon Barak, and which has been warmly embraced by his successors, Kachlon decided to stand alongside the High Court and support it. This was both a way of showing public-mindedness and an attempt to attract electoral support from sectors not normally included among “his” voters.

If Kachlon hoped that the Bagatz justices would reward him by turning down the quarrelsome petition, he was sorely disappointed. After the ruling was issued, he immediately declared that he would ask the Finance Committee to reconvene and approve the bill. He knew very well, though, that this was much easier said than done, for even among the coalition members are those who do not support the law, including Chairman Gafni himself.

However, Kachlon’s intentions are good and, as a sharp politician who wants to keep his election campaign promises, he appears to have chalked up at least a partial achievement in his campaign to reduce housing costs.

How Did It Happen?

While the Third Apartment Tax was the symbol of Kachlon’s policies, the fact is that he had several other tricks up his sleeve. For one thing, a high tax was levied on the purchase of a second apartment — 8 percent of the purchase price. This considerable expense deterred many potential investors from buying an apartment for speculation.

At the same time, Kachlon also pushed with full force a program called Mechir LaMishtaken (lit., Price for the Resident) — the construction of specially-priced new apartments for those who promised to actually live in them. Tenders were issued for the building of tens of thousands of units in all areas of the country. But these tenders were quite the opposite of the usual: Instead of granting construction and selling rights to the builder who offers the highest price for the land, the winner is he who guarantees to sell the finished apartments at the lowest price.

Kachlon thus put the squeeze on from both ends, shrinking the buyers’ market from two directions and beginning to drive down prices. On the one hand, many investors left the markets, deterred by the 8-percent tax, and on the other hand, the Mechir LaMishtaken plan attracted many young couples who had until then filled the contractors’ sales offices and thereby raised the prices of existing apartments. From both ends, fewer people are now looking for apartments on the open market, and the bubbling housing market has begun to cool off.

And like every aspect of economics, psychology also plays a role. Once the momentum takes a negative turn, the average investor seeking to buy a cheap apartment and sell it for a nice profit begins to realize that it’s not as easy as he thought. Even if the price of the unit doesn’t go down, it has to increase by at least 20 percent in order for him to make a profit, given the various taxes, including the Appreciation Tax. Until now, a 20-percent increase was virtually assured, but Minister Kachlon’s policies have changed this.

Among those who now face a new real estate reality in Israel are many foreign investors who turned several nice profits buying and selling quickly-appreciating apartments. There were cities where housing units increased by over 10 percent in one year, and people who bought there did very well for themselves. But it now appears that the party is coming to an end.

The numbers coming in from the field show that apartment prices all over the country — and even in Yerushalayim, where prices had skyrocketed — are dropping considerably, or at least leveling off. On the other hand, the supply of new unsold apartments is increasing, and the builders’ sales offices are no longer crowded with eager young couples or other would-be buyers. The eyes of all are turned toward the future which, as usual, is giving no indication as to what it holds.

The bottom line is that the Third Apartment Tax has not become law in Israel, nor does it look like it will in the near future. Minister Kachlon said just recently, “The law is not being reconsidered because of coalition problems, but I believe in it and I hope it will return.” He basically acknowledged that this will not happen, however, when he added, “I won’t break up the coalition because of this law.”

And so, the law probably won’t pass, but Kachlon is not taking it too hard. For why should he fret over it and struggle to overcome coalition controversies when the purpose for which it came into the world has been accomplished in other ways?