Assessing the of Fairness of Local Property Taxation: A Case Study of Tel Aviv, Israel

Abstract

The ad valorem tax system, based on property values, is a common approach to municipal property taxation. However, it is unclear whether this tax approach results in greater environmental fairness and social justice at the neighborhood level, compared to e.g., less sophisticated property tax estimation methods, such as the Arnona taxation, which is based on property size and currently implemented in Israel. To answer this question, we conducted several tax simulations for Tel AvivYafo, the second-largest city in Israel with about 450,000 residents. The simulation involved data on 2,000+ residential properties sold in 2022–2023. Our findings indicate that the tax rates, estimated using the Arnona system, correlate strongly with the socioeconomic status (SES) of the neighborhood (r = 0.787, p < 0.01), albeit this association is not either monotonic or linear. Currently, when the ad valorem tax system is used for tax rate simulations, the correlation between neighborhood SES and the estimated tax rates is found to be weaker (r = 0.475, p < 0.01), thus indicating even a less equitable tax pattern. These findings indicate that neither taxation system helps to achieve full socio-economic justness and environmental fairness. Given this conclusion, we recommend refining the Arnona tax system rather than replacing it altogether by the ad valorem approach. As we suggest, the revised Arnona tax system should incorporate the level of residential satisfaction with municipal services and the availability of environmental amenities in the neighborhood, data for which can be sourced in residential satisfaction surveys and databases maintained by environmental protection agencies.