Tax-Exempt U.S. Funding of West Bank Settlements

The New York Times put the contradiction in a single sentence in July 2010:

“As the American government seeks to end the four-decade Jewish settlement enterprise and foster a Palestinian state in the West Bank, the American Treasury helps sustain the settlements through tax breaks on donations to support them.”

Two arms of the same government, working against each other, in public, for decades. There is no conspiracy in this case and nothing hidden. The State Department opposes the settlements. The tax code helps pay for them.

How the mechanism works

American law grants 501(c)(3) charitable status on neutral criteria. An organization that funds schools, synagogues and community facilities qualifies, and donations to it are tax-deductible.

That deduction is the subsidy. When a donation is deductible, the Treasury collects less tax than it otherwise would, which means the cost is spread across every other taxpayer. It does not matter whether a given taxpayer supports settlements. The structure makes them a contributor either way.

Meanwhile, since 1967, every American administration of both parties has held that Israeli settlement of the occupied West Bank obstructs a negotiated peace. UN Security Council Resolution 2334, which the United States allowed to pass in 2016, affirmed the settlements’ illegality under international law.

What the reporting found

The Times, 2010. Examining public records in both countries, Jim Rutenberg, Mike McIntire and Ethan Bronner identified at least forty American groups that had collected more than $200 million in tax-deductible gifts for settlement in the West Bank and East Jerusalem over the preceding decade.

Most of it went to things that look unremarkable on a charity filing: schools, synagogues, recreation centers. Those are legitimate charitable purposes under the tax code. Some of it did not. The Times documented tax-deductible money paying for guard dogs, bulletproof vests, rifle scopes, and vehicles to secure outposts deep in occupied territory.

And some of it went to outposts that are illegal under Israeli law, not only international law. American charitable donations were financing construction the Israeli government itself had not authorized.

Haaretz and the Pulitzer Center, 2015. Five years on, the Israeli journalist Uri Blau went further and found that roughly fifty American tax-exempt nonprofits had moved more than $220 million to settlements in the five years from 2009 to 2013 alone. The uses ranged from air conditioners to support for the families of convicted Jewish terrorists and legal aid for Jewish extremists.

Blau also identified an asymmetry inside Israeli politics worth noting. The Israeli right has repeatedly attacked left-wing and human rights organizations for accepting foreign government funding and has pushed legislation to restrict it. The settlement organizations, funded by private American donations routed through American charities, attract no equivalent scrutiny.

Why it is hard to see

Both investigations ran into the same wall. Disclosure requirements in both countries are weak enough that no complete picture can be assembled.

Foreign government funding to Israeli NGOs is traceable, which is why it can be attacked. Private donations flowing through American nonprofits are not, which is why this money is harder to follow. Some of the identifiable donors are also significant funders of Israeli political figures and of American political campaigns.

The tool nobody uses

The Internal Revenue Service is not powerless here. It has authority to revoke charitable status on public policy grounds, and the Supreme Court upheld its use of that authority in Bob Jones University v. United States in 1983, stripping a university’s exemption over racial discrimination.

It has never applied that authority to settlement funding, and no administration has asked it to.

The defense of the current arrangement is not unserious. These organizations fund schools and religious institutions that satisfy neutral charitable criteria, and denying them status because of where they operate would raise real questions about viewpoint discrimination in tax administration. The counterargument is that funding activity contrary to declared American foreign policy and deemed illegal under international law is exactly what the public policy doctrine exists for, and that guard dogs and rifle scopes fall outside any charitable purpose however generously defined.

New York legislators have proposed a state measure that would bar tax-exempt charities there from funding settlements and allow Palestinians harmed by settler activity to sue in New York courts. It has not been enacted.

Why it matters

Most of this archive documents things that were concealed: a deception at Dimona, an agent inside naval intelligence, a shipment declared as radio tubes. This case is the opposite. Everything about it has been public since 2010, documented in the New York Times, from records anyone can pull.

Nothing happened.

Sixteen years later the money still moves, the deduction still applies, the IRS still has the authority it has never used, and the State Department still says settlements obstruct peace. The contradiction was not exposed and then defended. It was exposed and then simply carried on, which is a different and in some ways more telling result.

Sources

• The New York Times, “Tax-Exempt Funds Aid Settlements in West Bank,” Jim Rutenberg, Mike McIntire and Ethan Bronner, July 5, 2010
• Haaretz and the Pulitzer Center, “U.S. Donors Gave Settlements More Than $220 Million in Tax-exempt Funds Over Five Years,” Uri Blau, December 7, 2015, and the associated “From the U.S. to Israel: Follow the Money” series
• The Intercept, “Tax-Exempt U.S. Nonprofits Fuel Israeli Settler Push to Evict Palestinians,” May 14, 2021
• New Lines Magazine, “A Fanatical Israeli Settlement Is Funded by New York Suburbanites,” February 2024
• UN Security Council Resolution 2334 (2016)
• Bob Jones University v. United States, 461 U.S. 574 (1983)