Israel-Palestinian tax deal has implications beyond economy

The compromise over Israel's withheld tax revenues from the Palestinian Authority could present a step toward recognition of Palestinian sovereignty.

al-monitor Israeli Finance Minister Moshe Kahlon speaks during a ceremony swearing Amir Yaron in as Bank of Israel governor in Jerusalem, Dec. 24, 2018. Photo by REUTERS/Amir Cohen.
Shlomi Eldar

Shlomi Eldar


Topics covered

israeli-palestinian conflict, taxes, tax revenue, palestinian economy, palestinian authority

Oct 8, 2019

Israel transferred 1.5 billion shekels ($431 million) to the Palestinian Authority on Oct. 6. It was tax money that Palestinian President Mahmoud Abbas had been refusing to take because Israel had deducted a portion of it. With the transfer over the next few weeks of another billion shekels, the Palestinian Authority will be spared economic devastation. The transfers mark the end of six months of power games and mutual recrimination between Israel and the Palestinian Authority. Neither side won — more precisely, both sides came out losers.

To summarize, in early July 2018, the Knesset adopted the deduction law, which enabled the Israeli authorities to deduct stipends paid by the Palestinian Authority to Palestinian prisoners and families of Palestinian assailants from tax revenues collected by Israel on the PA’s behalf. The bill was advanced by two Knesset members: Avi Dichter (Likud) and Elazar Stern (Yesh Atid). They both crowed about how the law would teach the Palestinians a lesson and prevent them from encouraging terrorists to kill Jews. Right before the vote Dichter, a former Shin Bet director, sent a message to Abbas in Arabic: “A curse on your house, Mr. President. Instead of the Palestinian Authority that you head spending money on health care and education, you, Mahmoud Abbas, spend 7% of your budget on terrorism!”

Though the law passed with an absolute majority of 86 votes, Prime Minister Benjamin Netanyahu heeded the warnings of the defense establishment and was in no hurry to implement it. But two months before the April 2019 election, the Choose Life Forum of the Families of Victims of Terrorism called a press conference and told the public that the law had not been implemented and that despite its promises, Israel was not deducting money spent on terrorism from the tax money it collected for the PA. Netanyahu got nervous and called a meeting of his security cabinet to ask it approve retroactive implementation of the law. The measure was approved despite warnings from the defense establishment that it could lead to an escalation of tensions and even the collapse of the PA. No one would listen to these warnings, not before an election. The ministers were worried that Netanyahu’s right-wing base would punish Netanyahu otherwise.

Abbas decided to fire back. On April 29, he announced that the PA would refuse to accept the money if a single shekel was deducted. Like Netanyahu, Abbas was also unable to withstand the pressure, particularly from the families of the martyrs and the prisoners. The decision not only led to an economic crisis in the PA but improved the standing of the martyrs’ families and resulted in a promise to increase their monthly stipends. Meanwhile, the PA staff saw their own salaries sliced in half as a result of the crisis, fighting to survive economically while embracing Abbas for his courage in refusing to forsake “the families of the heroes.”

As the Israelis and Palestinians quickly realized, both would suffer. Israel worried that the PA would collapse and that there would be a resurgence of terrorism, while Abbas discovered that the world would not come running to save him.

The one person who rose to the challenge was Finance Minister Moshe Kahlon. Two months ago, his office cobbled together a partial solution in conjunction with PA Civil Affairs Minister Hussein al-Sheikh and Finance Minister Shukri Bishara. It involved granting a tax exemption on gasoline that the PA buys from Israel. Although it did not solve the entire problem, it did create some breathing room. And so, on Aug. 22, Israel transferred 2 billion shekels ($570 million) to the Palestinians. Israel chose to wait until after election season to come up with a more permanent solution, but as everybody knows, the election festival is still going strong. Meanwhile, the partial solution is no longer enough.

At the end of September, al-Sheikh contacted Kahlon again to ask for an urgent meeting. He was not acting alone, as there can be no doubt that he got the green light from Abbas. In any event, the two ministers met Oct. 3 to discuss how to turn back the wheel without either party coming out looking like it lost. How could they climb down off their high horses with dignity and appease the public on both sides? They came up with a joint committee to resolve contentious issues, a long overdue endeavor.

One Israeli source in the defense establishment told Al-Monitor on condition of anonymity that Kahlon acted wisely. He avoided combative statements like “We defeated Abbas,” or “The Palestinians folded once they realized that they could not defeat Israel.” Instead, he let al-Sheikh release a statement that every Palestinian living in the West Bank had been waiting to hear for six long months.

The crisis is over. The PA staff realized that despite their economic hardships for the past six months, all reports indicate that Israel did not step back from its plan to deduct the money used to support the families of the martyrs.

On the other side, Israel will be forced to open up the 1994 Paris Protocol — the documents that establishes the economic and financial relations between Israel and the Palestinians until a final status agreement is signed, though no one would have thought it would remain in place for over 25 years. One of its purposes was to prevent unfair competition with the Palestinian Authority over the purchase of raw materials and consumer goods. At the time, there was concern that goods brought into Gaza and the West Bank would trickle into the Israeli market, where they would be sold at low prices.

The joint Israeli-Palestinian committee will start reexamining and withdrawing from these economic agreements in favor of new understandings. The significance of such understandings, if they are reached, would be Israel granting Palestinians the right to take economic steps on their own, implying sovereignty and independence.

Israelis, particularly the right, were outraged by the compromise. The answer can be found in this Sunday’s meeting of the Security Cabinet, which took place while the money was being transferred. According to a report by Channel 13, Bezalel Smotrich and Ze’ev Elkin got into a heated argument with Kahlon, Shin Bet Director Nadav Argaman and the head of the Army Intelligence Corps’ Research Division, Brig. Gen. Dror Shalom, over what they called “Israel’s surrender.” They kept asking what Israel would receive in return for this compromise.

Based on their remarks, it seems that Israel did not deduct the entire sum of the salaries paid to terrorists. Rather, it reached a compromise with the Palestinians that left each side feeling that it got the better of the other, or at least each side recognized the dire political circumstances facing the other.

In the framework of the soon-to-start discussions of the newly established committee, Israel and the Palestinians are expected to reexamine the 1994 Paris Protocol. In the past, Abbas has threatened to withdraw from the agreements with Israel that discriminate against the PA, hand Israel control over its finances and force the PA to depend on third parties. Now, paradoxically, Israel would have to accept what it had repeatedly rejected, and all because of the deduction law, legislation that ultimately did not reduce terrorism but offered the PA a way to free itself of Israel’s suffocating economic hold and take steps toward economic independence.

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