The plan comes weeks after tough cuts to a range of welfare allowances came into effect as part of an 11 billion shekel ($2.5 billion) package of spending cuts aimed at reining in a swelling budget deficit.
Netanyahu plans to give income tax reductions of 13 percent to around 60 settlements defined by the Jewish state as “under threat of terror attack” in return for the support of the right-wing National Union party in passing the economic cuts package in May, according to the daily.
A spokesman for Netanyahu denied there was any such plan.
The tax reductions could encourage people to move to settlements.
Under international law all settlements on the occupied West Bank and Gaza Strip are illegal. Previous efforts to end the Palestinian-Israeli conflict call for a freeze in settlement activity.
The National Union initially asked Netanyahu to reinstate a seven percent income tax benefit enjoyed by all settlers that was cancelled in the economic plan.
All settlers in the occupied Gaza Strip, along with selected settlements in the West Bank, will enjoy the tax benefit.
Netanyahu is stalling presentation of the plan to the government for fear of public backlash following a protest by single mothers against the social benefit cuts that have grabbed national attention, reported the paper.