The Security Cabinet approved on Sunday Defense Minister Naftali Bennett's proposal to deduct NIS 150 million from the tax money that Israel transfers to the Palestinian Authority, intended for families of terrorists.
The decision followed a similar trimming in February of funds to offset the Authority's payouts to jailed Palestinian terrorists, for which the PA retaliated by boycotting all tax handovers for more than half a year, stirring worries it could go bankrupt.
Under interim peace deals from the 1990s, Israel collects taxes on behalf of the Palestinians, who put the current sums at $222 million a month. With diplomacy stalled since 2014, Israel has at times withheld money as a measure of protest or pressure.
Palestinian President Mahmoud Abbas, though hit by steep U.S. aid cuts by the Trump administration, has held to paying stipends to the families of Palestinians jailed on terror charges and of those killed or wounded by Israeli forces during terrorist activity.
Israel and the United States say the policy, which is scaled to give greater monthly payouts for prisoners serving longer sentences, invites violence. Abbas describes the Palestinian inmates and casualties as "heroes" of a national struggle.
"This (Israeli decision) will cost us a lot," Abbas told members of his Fatah party in the Palestinian hub city of Ramallah. "But we have rights and we will not be afraid."
Saying Abbas' administration had paid 150 million shekels ($43.37 million) in stipends for terrorist casualties in 2018, the Israeli security cabinet said the same amount would be garnished from within the taxes collected for the Palestinian Authority over the coming year.
The sum Israel said it would trim as of February was $138 million - reflecting prisoner payouts by the Palestinian Authority during 2018.
The total amount of money withheld now equals some 6.8% of tax funds due to the Palestinian Authority. The full remittances make up around half of the Authority's budget.
"For too long, we allowed the Palestinian Authority to pay salaries to terrorists. That party is over," Deputy Defense Minister Avi Dichter said on Twitter.
The United States passed legislation last year to sharply reduce aid to the Palestinian Authority unless it stopped the stipends. The measure, known as the Taylor Force Act, was named after a 29-year-old American military veteran fatally stabbed by a Palestinian while visiting Israel in 2016.
Washington has further slashed hundreds of millions of dollars to humanitarian organizations and U.N. agencies which aid the Palestinians as it seeks to pressure Abbas to come back to the negotiation table.
Abbas has shunned the Trump administration, accusing it of pro-Israel bias.