U.N. Middle East envoy Nickolay Mladenov and European officials have reportedly warned Israel that the Palestinian Authority could collapse if Israel implements a law to deduct stipends paid to terrorists from the tax revenue Israel collects on the PA’s behalf.
Diplomatic officials relayed messages to Jerusalem saying that implementing the law would bring the PA, already in a dire financial situation, to its “breaking point” and could cause a complete “system failure.”
The officials said the PA already has a $1 billion deficit, and if the law is implemented, donor countries would stop paying for the PA’s daily operations and instead would fund humanitarian projects. 
Moshe Shai While foreign officials have decided to raise their concerns with Jerusalem, they are not pressuring Israel at this time.
The so-called terrorist payments law was enacted six months ago. It stipulates that at the beginning of every calendar year, Israel’s defense minister must report to the cabinet the total amount paid by the PA to terrorists imprisoned in Israel and their families, after which the minister must withhold that amount from the tax revenues Israel collects for the PA. The funds are to be deposited in a trust until the Palestinians stop using them to encourage terrorism.
The law includes a clause promoted by Prime Minister Benjamin Netanyahu, in which payments made by the Israeli government to communities near the Gaza border to cover damage caused by Palestinian arson terrorism are also to be deducted from PA’s tax revenues.
According to government assessments, the PA pays over 1 billion shekels ($270 million) in terrorist stipends every year, and its finances will be hit hard by the funding cuts.
Senior diplomatic and security officials in Israel voiced concerns that the cuts would cripple the PA, but the bill’s proponents, Yesh Atid MK Elazar Stern and Likud MK Avi Dichter, insisted on pushing the bill through and called the defense establishment’s warnings exaggerated.
Netanyahu has publicly condemned the PA’s practice of paying stipends to terrorists. In a speech to the U.N., Netanyahu slammed PA President Mahmoud Abbas for “proudly paying Palestinian terrorists who murdered Jews. In fact, the more they kill, the more you pay. That is also in their laws.”
