Why freezing Palestinian taxes won't help Israel

Israel's freezing of Palestinian tax revenues is contributing to the dire economic situation in the West Bank and could accelerate the beginning of another cycle of violence.

al-monitor A Palestinian policeman gestures as Hamas-hired civil servants wait to receive salary payments in Gaza City, Oct. 29, 2014. Photo by REUTERS/Mohammed Salem.
Shlomi Eldar

Shlomi Eldar


Topics covered

taxes, palestinian authority, palestine, mahmoud abbas, israeli-palestinian conflict, israel, hamas funding, gaza strip

Mar 31, 2015

The Palestinians knew with certainty that a few days after the Israeli general elections on March 17, the tax funds that Israel froze in January would be released.

How did they know? For the past two decades, the tax revenues collected by Israel under the 1994 Paris Agreement have been used as a political tool to placate the Israeli public. This questionable economic weapon has always proven to be not only ineffective but even detrimental to Israel's security interests. Yet, as far as the decision-makers are concerned, this is a readily available and harmless practice if used in moderation.

This time, too, the Israeli punishment meted out following the request of the Palestinian Authority (PA) to join the International Criminal Court (ICC) in December 2014 was limited to the duration of the electoral race. At the end of the three months of sanctions, and just short of the PA’s economic collapse or a violent outburst in its territories, the prime minister “acquiesced” to the entreating of Israeli security officials and ordered the unfreezing of the funds, despite the Palestinians not having withdrawn their appeal to the ICC.

The tax revenues Israel collects and should transfer monthly to the Palestinians in accordance with the September 1995 "Oslo II" Accord make up about half of the PA's operating budget. The rest comes from the taxes it collects from its population — much of which is exempt or pays a minimal fee due to the dire economic situation — and donations from various countries. US aid amounting to hundreds of millions of dollars was also withheld over the PA's appeal to UN institutions. Just a one-month freeze was enough to shake the entire economic structure of the PA, which has no emergency reserves.

According to the interim agreements (the April 1994 Paris Protocol), a uniform Customs Envelope between Israel and the PA was established for all the products and raw materials the Palestinians import into the territories. Israel collects the agreed-upon customs and at the end of each month, once the accounts are settled, is supposed to transfer them to the PA’s coffers.

In January 2015, for example, Israel collected some 400 million shekels ($100 million), roughly half of the PA’s monthly budget. This sum also includes trade and taxes from Palestinian workers employed in Israel. As noted, the freeze lasted for three months, and had it not been for $100 million in Saudi emergency aid and a $20 million donation from Algeria, it is doubtful that the government of PA President Mahmoud Abbas would have survived.

This week, just shy of an economic collapse, Netanyahu ordered the funds unfrozen, giving the PA a breather. What he seems to be intimating is that if the PA acts as Israel expects, the money will be regularly transferred in the coming months. But if it does not, the political weapon will be used again.

Netanyahu did not invent this practice. The first to use it was former Prime Minister Ehud Olmert. Following the PA election in January 2006, when Hamas won, Olmert decided to punish the Palestinians for their vote. That freeze lasted until the coup in the Gaza Strip in June 2007. One of the reasons that brought about the collapse of the Palestinian security bodies in the Gaza Strip during the coup was the poor morale of the Palestinian policemen, who did not lift a finger to stop the movement’s military power. During the freeze period, from January 2006 to July 2007, PA employees (including police) received only part of their salaries, which was raised from donor countries. As the PA’s policemen shuttled between the United Nations Relief and Works Agency for Palestine Refugees in the Near East and Hamas welfare institutions in Gaza, the "Tanfitiah" policing forces, which were set up by Hamas and over the years became the movement’s military, received salaries and benefits through donations from Iran and Syria. We know how it all ended: the low morale of Abbas’ security forces tipped the balance. Their lack of motivation to fight and shabby equipment affected their actions against the Hamas movement.

Incidentally, shortly after the coup, when Gaza fell into Hamas’ hands, Olmert said ​via US Consul in Jerusalem Jacob Walles that he was lifting the freeze. Abbas could only have smiled bitterly.

Even now it can be assumed that Abbas is sporting a bitter smile. The functioning of the Palestinian security forces in the territories is also an Israeli interest. Despite the strained relations between Israel and the PA, the security coordination continues, and according to Palestinian security sources who spoke to Al-Monitor recently, it is closer and more effective than it has ever been.

Israel continues to step on the Palestinian oxygen tube, releasing it seconds before the PA goes belly up. Is this weapon so effective that it can “teach” Abbas and the PA not to make moves of which Israel disapproves? Probably not. Has Israel learned its lesson? Once again, probably not. The Netanyahu government's frequent freezing of funds did more than just deteriorate the PA's financial status and the (relative) well-being of its residents. The reports coming from the West Bank in recent months paint the picture of an embittered population that is angry, desperate and has lost any hope for change. A diplomatic agreement is nowhere in sight. The two-state solution now seems farther than ever. And Abbas, who celebrated his 80th birthday this week in the PA headquarters in Ramallah, is getting weaker by the day.

When the West Bank erupts once again — probably only a matter of time — the cynical political game of the tax funds will surely be considered one of the catalysts. Netanyahu tried in the past to lead an economic peace between Israel and the PA, believing it was the best way to promote calm between the nations. But in reality, this week he acted again contrary to his own conviction.

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