State Budget 2026: Tax relief for the middle class by increasing the deficit and other reforms

The law consists of two blocks – budgetary (which has a direct impact on the items of the state budget), which includes 6 chapters, and regulatory (which has no real connection with the state budget, and concerns changes in state regulation), which includes 11 chapters.

Budget block

Tax break for the middle class

In fact, the only “brainchild” of Smotrich approved for implementation was the expansion of the third and fourth stages of income tax, reducing the tax burden for the middle class – Israelis with a gross income ranging from 16 to 25.1 thousand shekels per month.

The cost of this step to the state budget is 5.5 billion shekels per year, which was planned to be financed by reviving the tax on empty land. However, this reform encountered resistance within the coalition and was eventually removed from the agenda, so that financing for reducing the tax burden on the middle class will be financed by increasing the state budget deficit, that is, by increasing the public debt.

Stimulating repatriation

The initiative of the Minister of Aliyah and Integration Ofir Sofer found sufficient support to pass through all stages of approval. Repatriates and re-emigrants who arrived in Israel for permanent residence in the period from November 25, 2025 to December 31, 2026, receive a significant tax benefit: labor income received in Israel is exempt from tax within the following limits: in 2026 – up to 600 thousand shekels, in 2027-2028 – up to 1,000,000 shekels per year; in 2029 – up to 350,000 shekels; in 2030 – up to 150,000 shekels. The benefit does not apply to income received through the repatriate’s own company if he is the controlling shareholder there. In 2026, the benefit is calculated in proportion to the period of actual residence in Israel that year.

Excess profits of banks

The mechanism of the tax on excess profits of banks, which was supposed to bring 7.5 billion shekels to the state treasury over four years, was changed at the last moment. As a result, the banks will pay only half of this amount, but of this, 3 billion shekels already in 2026, and the rest, 250 million shekels, in 2027.

Tightening the circulation of cash and checks

A block containing three amendments to laws limiting the use of cash. The new law closes a loophole through which large checks were exchanged for cash bypassing restrictions: from now on, check-for-cash accounting is only allowed for amounts up to NIS 6,000 – the same as regular cash payments between businessmen. Currency changers and other non-bank financial intermediaries are required to report quarterly to the tax authorities on transactions over NIS 50,000, including a declaration of the absence of such transactions, so that silence no longer serves as a cover. An entrepreneur who violates the rules for cash payments is deprived of the right to deduct these expenses from the tax base and offset VAT.

Closing the Tax Loophole for Investment Savings Banks

The law eliminates the discrepancies between the norms for investment pension funds established by the regulator and the norms under which they are entitled to tax benefits.

Law on mutual settlements between hospitals and health insurance funds for 2026-2030

The law largely replicates the mechanism for mutual settlements between hospitals and health insurance funds, periodically updated by the Knesset since the 1990s, but introduces new parameters. A key innovation is the promotion of hospitalization at home: the budget for the development of home hospitalization will be NIS 30 million in 2026, NIS 40 million in 2027 and NIS 50 million annually starting in 2028.

An important territorial restriction has also been introduced: hospitals must focus on activities within their campuses and are not allowed to provide public services in place of sickness funds without special agreements. Funds can pay hospitals for services provided outside the hospital walls only in clearly defined cases – hospital care at home, a service by agreement between the parties, or a service with special permission from the Director General of the Ministry of Health.

Regulatory block

Small Bank Reform and Guarantee Market Reform

The most significant of the regulatory blocks is the package aimed at reducing the influence of the big five banks.

One reform allows non-bank entities to create small banks with lighter regulation. Credit card companies and insurance companies will be able to accept deposits from the public and compete on equal terms with the big five banks. Regulation will become stricter as the volume of assets of a small bank grows, with thresholds of 2.5% and 5% of total assets of the banking system. Supervision of small banks will remain in the hands of the Bank of Israel. According to the Ministry of Finance, increased competition could save small and medium-sized businesses about a billion shekels a year in borrowing costs.

The second reform opens up the financial guarantee market, hitherto exclusively limited to banks, to competition. The old legislation obliged companies to provide exclusively bank guarantees when participating in tenders and concluding a number of transactions, which actually consolidated the monopoly of banks in this segment. From now on, guarantees from licensed insurers, credit companies and systemically important payment providers will be accepted on a par with bank guarantees. The reform directly benefits small businesses: non-bank guarantees are cheaper, do not require collateral and are issued much faster.

The package would also include a third reform, which the Bank of Israel considered the most important of the three, the creation of a small business credit database similar to the personal credit database. This step was supposed to significantly facilitate small businesses’ access to the lending market, reducing their dependence on a particular bank. As a result, under pressure from the legal adviser to the Knesset, Sagit Afik, this reform was excluded from the law on state regulation.

Reducing environmental supervision over construction

Environmental approvals in housing projects are considered to be automatically obtained if the requirements pre-established by the Ministry of Environment are met or if there are no such requirements. The time limits for making procedural decisions are also limited.

Diversification of recruitment patterns in the Israel Police

Extension of the forms of hiring specialists previously launched in the intelligence services to the Israeli police. The police have the opportunity to hire expensive specialists on better remuneration conditions than the standard police salary scale, but without preferential pension conditions.

Fire Safety Standards

The law legalizes American and international fire safety standards as a full-fledged alternative to Israeli standards, and exempts people from criminal liability if they have the appropriate certificate.

Facilitating competition conditions for state-owned defense companies

A special legal regime has been created for large state-owned defense exporting companies (Rafael, Aviation Industry), allowing them to quickly appoint directors to foreign subsidiaries, bypassing standard cumbersome procedures. At the same time, Israeli corporate governance standards partially apply to foreign subsidiaries.

Simplification of the procedure for transferring abandoned property to the state

If the owner of the property is found, but does not respond to notices of entry into rights within 3 years, the state can obtain ownership of the property through the court. If abandoned property has been under state management for 15-25 years (depending on the circumstances), it automatically becomes its property. An owner who shows up after this period is entitled to compensation.

Infrastructure regulation block

The work procedure of the compensation commission within the framework of the metro construction project has been clarified: the commission’s decisions can be appealed to the administrative court, and the procedures for notifying the parties are brought into line with general planning legislation.

Opportunities for flexible redistribution of construction volumes between adjacent sites are expanding within the framework of approved national infrastructure plans. For road facilities and underground structures (including the space under bridges), special standards are introduced for permissible areas.

The requirement for government approval when making a number of decisions in the railway sector is removed – a slight deregulation.

The composition of the interdepartmental committee for resolving conflicts between infrastructure operators (gas, electricity, water, transport, metro, communications) is being reformed.

National Insurance Office

The obligation of employers to notify the National Insurance Institute (Bituach Leumi) about the profession (according to the unified CSB classifier) ​​and the place of residence of employees starting in 2030 (from 2027, data will be requested on a voluntary basis).

Water management

Measures have been approved to force the separation of water sector finances from general municipal finances in settlements where it has not yet been separated. Mainly aimed at improving water management in Arab settlements.

Stimulating R&D

A tax credit scheme for research and development expenses for global corporations: companies in the center of the country receive 3-4%, companies in the periphery and mega-corporations – 25-30%, and above the threshold of NIS 1.05 billion of expenses per year the rate increases.

A key feature of the scheme is the ability to convert unused tax credits into cash. Unprofitable companies and startups for which the credit itself is useless can receive the entire amount as a direct grant three years after the year of R&D.

Raising taxes on global corporations should bring the treasury at least 3 billion shekels a year – the new scheme partially restores their competitiveness without violating OECD requirements.