Israeli political parties are state funded. The way it works is that parties receive funds according to the number of seats they hold in the Knesset and are subject to legal restrictions on how much they can spend in election campaigns. They are allowed only limited non-state funding sources, which are small private contributions and membership dues and there is a ban on anonymous contributions, contributions by people who are ineligible to vote or public associations.
Any party which wins more than 1% of the vote is entitled to a refund of some of its election expenses (2% of the vote are required for a seat in the Knesset).
New parties that register for an election can use some financing sources that are not available to existing parties but are still subject to many of the restrictions. TV time is allocated on the basis of 25 minutes for every party running in the election + 6 additional minutes for every MK in the outgoing Knesset.
If a party with Knesset seats splits, the splinter group can take a proportion of the funding, particularly if the splinter group includes more than 5 members of Knesset. In general funding is calculated in a way that each five MKs gets you a higher level of funding.
Overall I think its a great system. In theory at least, it restricts the ability of big business (or trade unions) to control the parties and provides what would seem like a completely fair frame work. Israel has a vibrant democracy is which the system responds rapidly to voter shifts and new parties easily emerge, however there are serious problems.
One problem with this system is that it encourages party splintering. Once elected the MKs are not dependent on the party membership for future funding. They are now the source of the party's funding and if they choose to break away from the party to form a new party they can take their funding with them. Politicians with sufficient public following - Tzippi Livni being the prime example - can now elect to form a new party with a group of associates from other parties. Being a new party enables them to initially circumvent restrictions on political party funding. When Tzippi Livni failed to win the leadership election in Kadima she simply left the party with a group of followers and formed a new party in which she controlled the list. Positions 2 and 3 of her list of candidates for the elections were former leaders of the Labour party who had, like her, had lost their leadership elections (Amram Mitzna and Amir Peretz). It is probably no coincidence that soon after the political funding law was passed, Ariel Sharon left the Likud with a large number of Knesset members (including Livni) and picked up a large number of Labour MKs on the way.
A second problem is the emergence of parties with low levels of dependency on their membership. Many of the new parties have no or little national organizations and whatever organization they have is as often as not staffed by paid operators rather than volunteers. Meanwhile, the larger parties rely on membership votes to decide their list and MKs need to endure expensive, difficult to fund, campaigns with uncertain results. Obviously its easier just to leave the party and take your funding with you. Big business and trade unions can control the big parties by funding the individual leadership elections which are not state funded. Funding individuals may be a more effective path to political control then general party funding.
My view is that the law needs to be reformed so as to increase the importance of local party membership and discourage party splinter groups. Part of funding should be dependent on the existence of local branches with emphasis on representation in the peripherial areas. Groups which leave existing parties should not be able to take all the funding with them and sitting MKs who form new parties should face funding restrictions.