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v  A Bank of Israel analysis shows that the locality-based income tax credits in Israel are not an efficient policy tool for attracting people to move to the periphery:  Only about 10 percent of the potential credits in 2008 (which totaled NIS 921 million) were given to salaried employees who moved to beneficiary localities, and only a minority of those employees moved due to the tax credits. About three-quarters of the potential credits were given to veteran residents who probably would not have moved away from the beneficiary localities had they not received the credits, and about 12 percent were given to employees who doubtfully lived in the beneficiary localities.
v  The experience accumulated in the previous decade shows that granting credits to additional localities in 2016 may strengthen incoming migration to those localities to a certain extent, but at a high cost, and that it is not expected to have an impact on outgoing migration.
 
 
The Knesset recently decided to expand the number of localities receiving income tax credits from 182 to about 430 as of 2016, at a cost of about NIS 1.2 billion per year.  In past decades, income tax credits were given to the residents of certain localities in order to attract more established population groups to economically weaker localities, strengthen the periphery, and encourage settlement along the country’s borders.
 
As part of the law, the Bank of Israel was tasked with studying the tax credits and their effects. A first glimpse is currently being published here. The study examines the efficacy of the tax credits by studying the reform made to the credits in 2003, which reduced the number of localities receiving the credits from about 460 to 165. The study uses data from the 2008 census and from employer-employee data files from 1998 to 2012 in order to understand the migration and employment trends among the benefit recipients.
 
The results cast doubt on the efficacy of the locality-based credits as a tool for attracting migration to the periphery: Only about 10 percent 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. This can be inferred from outward migration rates from localities where the credits were changed in 2003 (an explanation appears below). About 12 percent 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.
 
Another analysis focused on Jewish localities in the north where the benefit was changed only one time during the examined period, in 2003, in order to isolate the effect of the change on migration to and from the beneficiary localities.  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 analysis shows that 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.
 
Distribution of the locality-based income tax benefits and the characteristics of the beneficiariesa among salaried employees by population group, 2008
 
 
All potential beneficiaries
Migrated to the locality between 2003 and 2008
Of which: migrated from the Tel Aviv, Center and Haifa districts
Veteran residents
“Registered” residentsb
Cost of the credits
(NIS million)
921.6
96.3
39.4
702.2
116.5
Percentage of expenditure on credits
100.0%
10.4%
4.3%
76.2%
12.6%
Number of benefit recipients (thousand)
85.7
8.2
3.3
65.9
10.7
Rate among all recipients
100.0%
9.6%
3.9%
76.9%
12.5%
Average benefit (NIS thousand)
10.8
11.8
12.1
10.7
10.9
Average age
41.4
35.8
35.4
43.3
33.9
Average number of years of education
13.7
14.7
15.0
13.4
14.4
a The potential tax credits are equal to the difference between the actual tax payments and the tax payments excluding the locality-based credits, and are calculated based on personal information collected in the 2008 Census and according to gross income from personal labor (according to eligibility, not uptake).
b Residents who have an official address in the beneficiary localities but were surveyed in another locality for the 2008 Census.
SOURCE: Bank of Israel calculations based on 2008 Census (Central Bureau of Statistics) and Employer-Employee data file (Israel Tax Authority).