TEL AVIV — After Israel announced plans to freeze the transfer of $126 million in taxes it collected for the Palestinian Authority, Palestinian Prime Minister Rami Hamdallah attended a round of meetings in Saudi Arabia to nurture solidarity for his government.

And they obliged. The Arab States promised that if Israel wouldn't transfer the money, the Gulf countries would provide the Palestinian Authority $25 million every month. Freezing the funds is another step in the escalating political power struggle between the administration of Israeli Prime Minister Benjamin Netanyahu and Palestinian Authority President Mahmoud Abbas.

Israel has made similar threats in the past, but they were withdrawn and ultimately the funds were transferred. Even if the Palestinian Authority's stability is clearly in the interest of Israel, it could collapse if deprived of these critical revenues. In the face of previous threats, Abbas has warned that the Authority could be dissolved.

Without it, Israel would have to bear the responsibility of funding services in the territories. Furthermore, Israel would have to cope without the assistance of the Palestinian services that help coordinate security between the two sides.

But unlike the cases of previous threats, there appears to be little suggestion this time that the Palestinians and Israelis will resolve the situation. This may represent Israel's first significant response to the Palestinian appeal to The Hague's International Court of Justice. Moreover, with the elections approaching, Netanyahu is unlikely to back down.

Israel is capable of taking a significant series of economic measures against the Palestinian Authority since it almost completely contols it. Some 80% of the exports from the West Bank and Gaza are to Israel. The Palestinians buy from or through Israel all of their basic necessities, and 150,000 of them are working in the Israeli market.

The annual budget of the Palestinian government is $4 billion, 40% of which is funded by taxes collected by Israel for the Palestinians. Additionally, Israel gives back to the authority the Value Added Tax (VAT) that Palestinians pay in Israel. The rest of the budget is funded by donations from abroad and by taxes and tolls collected by the Palestinian government itself. The income tax represents only 7% of the budget.

The Israeli treasury transfers the money to the government in Ramallah every month. The amount primarily covers Palestinian government salaries, including for people employed by the security forces, and the education and health systems. The budget also covers monthly pension payments to the families of security prisoners and victims.