Bigger LGU revenue share key prelude to federalism

Posted on February 21, 2017

FEDERALISM is expected to address imbalances in regional growth by increasing local government units’ (LGUs’) share of the budget as well empowering them in the areas of policy formulation and revenue generation.

The Makati skyline -- BW file photo
“Federalism will increase LGU’s share from the national government,” Union of Local Authorities of the Philippines Executive Director Sandra T. Paredes said in a text message last week, adding that the Internal Revenue Allotment for LGUs must increase as a prelude to federalism should the government make the shift.

“You can expect more revenue on the regional level, more budget and power given to them (LGUs),” said University of Santo Tomas political science professor Edmund S. Tayao in a phone interview last Thursday.

According to Mr. Tayao, one of the problems faced by the Philippines is the growth imbalance favoring highly urbanized areas.

Given the “leverage” that highly urbanized areas have over small provinces, businessmen would rather pay taxes to cities “to the detriment of the small provinces.”

“For example, if you’re a businessman, what leverage would you have if you paid taxes to a mayor of a small town? But if you paid in Makati, if that’s a business strategy, what leverage would you have in Makati versus a small town,” said Ms. Paredes in an interview.

Currently, the law allows taxpayers to choose where they pay their tax.

Federalism, meanwhile, might be able to address this problem as LGUs will have enough autonomy to make their own policies and programs, including that of collecting tax from businesses and land owners.

“Federalism will improve revenue generation because it will incentivize LGUs to get their act together in policy and program formulation and development planning, which will give them power in planning how to collect taxes,” Mr. Tayao said.

According to Ms. Paredes, under a federal government, LGUs will have more fiscal autonomy as more power will be given to the LGUs.

Still, Ms. Paredes thinks revenue must still be pooled within the state and then allotted to LGUs since tax collections of LGUs will not be equal.

“If the LGUs don’t collect much tax, if they’re going to retain that income within the LGUs (without a revenue sharing measure), what will happen? The government should still pool and share the income, but the share of the LGUs should be bigger,” Ms. Paredes said.

“Perhaps our target could be ideally 40% and then 50% and then 60% (of the Internal Revenue Allotment). A 60% share for local, 40% for national... Fiscal sharing should be a prelude to federalism with the LGU share growing because the expectations of the people on local officials will be bigger,” Ms. Paredes added.

However, this may not be the case as the National Economic and Development Authority (NEDA) does not yet have a position on how to arrange tax collection and revenue sharing under a federal set-up.

“It very much depends on how we will apportion fiscal responsibilities under a federal system. Of course, the idea is to increase the fiscal autonomy of LGUs. How exactly that will look, I don’t know yet,” said NEDA Deputy Director-General Rosemarie G. Edillon in a text message. -- Danica M. Uy