Finance Ministry eyes new taxes as AI threatens jobs and state revenues

Amid concerns that rapid AI adoption in the workplace will eliminate jobs and erode income-tax revenue, the Finance Ministry is proposing a package of new taxes to offset the expected shortfall in the state’s coffers.

The interim report and its policy recommendations, led by chief economist Dr. Samuel Abramzon, come after a wave of layoffs has shaken Israel’s vaunted tech industry in recent months, sparking fears that the use of AI is curbing hiring and replacing jobs with software and services from abroad.

That threat is, in turn, posing a challenge to state revenues because tax on labor income, including wages, and social security contributions make up the lion’s share of state revenue collection. In Israel, tech employees pay more than a third of all tax income collected, which underpins the vital importance of the industry as a source of government revenue.

“A decline in labor’s share of GDP could lead to a reduction in state revenue collection from labor income taxes,” the report cautioned. “Furthermore, there is concern that payments to workers in Israel will be replaced by payments for services provided outside of Israel, further eroding Israel’s tax base.”

“Without adjustments to the tax system, and in the absence of alternative sources of revenues, this trend could lead to high fiscal deficits,” the report warned.

The policy recommendations come as changes brought by AI and automation have sparked a global debate over dedicated taxation of AI-related activities, including data centers, robots, computing power, tokens, and usage.

The proportion of Israeli businesses using AI increased to 39% in 2026 from 28% a year earlier, according to Central Bureau of Statistics (CBS) data cited in the report. Israel’s AI adoption rate is high compared with the European Union, where the average stands at 20%, according to the report.

“AI tools generate ongoing income to their owners, yet current tax law does not levy tax on the technology itself,” Doron Mutai, head of the Israel tax practice at the Pearl Cohen law firm, told The Times of Israel. “If employees in Israel who perform certain jobs are replaced by AI agents located elsewhere, the question is how the Israeli government would be able to levy taxes on these activities where labor is not involved but creates income.”

More broadly, much of the debate around the fast adoption of AI technologies and tools has focused on safety risks, including threats to the future of humanity, and other changes it could bring to the economy and society.

In the report, Treasury officials raised concerns that profits currently linked to research and development in Israel, especially by multinational companies, could increasingly be shifted to parent companies and other countries with more advanced AI infrastructure, such as the US.

Some of the world’s largest multinational tech companies, including Nvidia, Intel and Microsoft, have established R&D centers across Israel and are among the country’s biggest employers.

“The issue is that multinational companies could generate income through AI tools from activities that in the past were performed in Israel,” said Mutai. “The challenge for the Israeli government is to find ways to levy tax on foreign corporations, even though under the current legal perception the source of income is located outside of Israel.”

In the report, Abramzon, in consultation with government officials and other experts, recommended against imposing dedicated taxation to target AI and automation, arguing that such a move could harm the attractiveness of the Israeli economy and tech investments.

To meet the need to increase state revenues, the Finance Ministry is instead proposing a package of taxes levied on passive income, rather than labor income. The taxes would not necessarily target AI companies.

The package includes taxes on undeveloped land, equity compensation, and capital gains from the sale of shares and options, alongside a higher levy on certain luxury goods.

In addition, the ministry is proposing collecting a previously floated value-added tax on imported digital services, also known as the “Netflix tax.” The levy would apply to foreign streaming and digital service providers such as Netflix or Disney+, but the cost is expected to be passed on to consumers in the form of price hikes.

Mutai said higher taxes on passive income would be a welcome development.

“Compensation for the expected reduction in state revenue should come from higher taxation on capital gains and other types of passive income, while taxation on labor, which is very high in Israel and can be up to 50 percent, should be lowered to encourage people to work,” he said.

Finance Ministry officials stressed the importance of a stable, predictable tax system in the AI era, both to preserve Israel’s appeal as a hub where companies register and operate and to prevent income from being shifted abroad.

“The level of uncertainty regarding the pace and scope of the impact of AI is extremely high,” the report said. “Ensuring a stable tax base over time also requires maximizing the economy’s growth potential.”

“In the AI era in particular, this means maintaining a globally competitive business environment,” the report urged.