Fairer revenue allocation needed for local consumption tax reform

The Yomiuri ShimbunHow should the uneven distribution of consumption tax revenue, now concentrated on Tokyo and other big cities, be corrected? A fair revenue allocation system must be established by revisiting the significance of the local consumption tax system.

The government and ruling coalition parties are contemplating revising the shares of consumption tax revenues that are distributed to prefectural governments. They intend to reduce the percentage set for major prefectures such as Tokyo and increase the ratio for other prefectures.

These measures will be incorporated into the outline of tax system reform for fiscal 2018 to be compiled by the coalition parties in mid-December.

About one-fifth of the 8 percent consumption tax, or 1.7 percentage points, is designated as local consumption tax. Local consumption tax revenue of ¥4.6 trillion is estimated for fiscal 2017.

Half of local consumption tax revenues go to prefectural governments and the remaining half to municipalities. The distributed tax revenue is a major fiscal resource for each prefectural and municipal government.

The distribution of tax revenue changes greatly depending on how consumption behavior across prefectural borders is estimated. The planned revision must reflect the actual situation more exactly.

The revenue from local consumption tax should be allocated, in principle, to local governments where goods or services are finally consumed.

In the case of goods bought in Tokyo being consumed at households in neighboring prefectures, it can be said that prefectures and municipalities where households are located should obtain tax revenues.

Under the current estimation method, 75 percent of the total local consumption tax revenue is allocated in proportion to the sales value of goods and services of each prefecture. This is said to be a system advantageous to major prefectures such as Tokyo where many people come from other prefectures to shop.

Comprehensive view needed

The government and ruling parties have started looking into the possibility of lowering the percentage of revenue allocated in proportion to sales value to about 50 percent of the total local consumption tax revenue and increasing the portion of revenue allocated in proportion to population. If this happens, the amount of tax revenue allotted to the Tokyo metropolitan government is estimated to decline by more than ¥100 billion from the ¥630 billion recorded for fiscal 2016.

Chief Cabinet Secretary Yoshihide Suga expressed willingness to carry out the revision plan, saying, “The government will positively tackle the task of rectifying the uneven distribution of tax revenue sources for the benefit of regional revitalization.” Tokyo Gov. Yuriko Koike opposes the plan, arguing that it is “a shot fired at major urban areas.”

In reviewing the revenue distribution system, it is essential to have the perspective of enhancing the equitability of tax revenue sources among local governments so that the revision will be able to gain wide-ranging understanding.

Tokyo and other major prefectures, where firms’ head offices and large population coincide, stand out in the first place not only in consumption tax revenue but also in overall tax revenue.

For many prefectures and municipalities, it is impossible to expect a favorable turn in fiscal conditions with an increase in their share of distributed consumption tax revenue alone. They also face such difficult challenges as the aging and declining of their population progressing faster than in urban areas.

To achieve regional promotion, it is important to study from a comprehensive standpoint what the local tax grant, which helps make up for tax revenue shortfalls of municipalities, and local taxes should be about.

Independent tax revenue sources of local governments must be expanded. All local governments must focus on spending reforms that strictly eliminate wasteful projects. The challenges are undeniably diverse.

The central and local governments must work together to accelerate the establishment of a next-generation tax system.

(From The Yomiuri Shimbun, Dec. 1, 2017)Speech


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