THE IMPLEMENTATION of the Supreme Court ruling expanding the local governments’ share in national taxes next year would lead to a “three percent lower economic growth,” according to Department of Finance (DoF) estimates.

The DoF in a statement on Tuesday said the higher tax allocation for local government units (LGUs) would dampen spending efficiency because the National Government usually spends at double the pace.

Lower spending efficiency refers to the reduced share of productive spending — or funds that go back to the economy by creating jobs or stimulating demand — to total spending.

“Based on our estimates, the implementation of the Supreme Court’s 2018 ruling will yield lower economic growth because local governments spend less efficiently,” Finance Secretary Carlos G. Dominguez III said.

The Supreme Court’s Mandanas ruling is named after Batangas Governor Hermilando I. Mandanas who successfully challenged the government’s previous position that LGUs were entitled to a smaller share of National Government funds.

Starting in 2022, LGUs will get a bigger share of the National Government’s tax collections, alongside the transfer of basic services.

President Rodrigo R. Duterte in June signed Executive Order (EO) 138 which transfers a number of basic services to LGUs by 2024. With this, the government is shifting programs and projects, worth an estimated P234.4 billion, to LGUs.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said there are more policy uncertainties among LGUs when it comes to spending, compared with continuity at the national level.

“LGUs may vary in their management style in terms of handling various government projects — while more standardized at the National Government level — amid some continuity issues as local officials are re-elected every three years,” he said in a Viber message.

Greater funding flexibility for LGUs positively affect those that spend efficiently, he said, but misappropriation and wastage are a drawback for others.

The World Bank has said that funds that the LGUs fail to spend could increase by P155 billion next year, or the equivalent of 0.7% of gross domestic product (GDP), if their capability to enforce projects are not upgraded.

Unspent budgets waste opportunities to bring crucial services to communities that need them most, World Bank economist Kevin Cruz said in June.

World Bank estimates found that tax allotments to LGUs could grow by 55% to 1.08 trillion next year.

To minimize economic scarring from the pandemic and the larger share of LGUs on national taxes, Mr. Dominguez said the Finance department is reviewing a possible fiscal consolidation plan, or policies aimed at reducing the country’s deficit.

“Tax revenue losses from the pandemic-induced economic slump, the rise in debt to fund our COVID-19 response, the looming revenue impact of our economic recovery measures, and lower spending efficiency as a result of the Supreme Court decision to expand the share of LGUs from the national tax allotment (NTA) must be adequately addressed by the next administration’s economic team,” he said.

The DoF flagged revenue losses and financing costs caused by the pandemic-induced economic decline. The department estimates revenue losses stood at P785.64 billion for 2020 and anticipates higher foregone revenues as the country enforces its tax reform programs.

Loans to finance the coronavirus disease 2019 (COVID-19) response has reached P1.47 trillion, or $28.91 billion, DoF said.

“The outstanding balance or the principal value of the loans is US$22.58 billion or P1.15 trillion, while the projected amount of interest payments until maturity is US$6.32 billion or P320.85 billion,” DoF said. “These loans will mature between 2024 and 2060.”

The DoF plans to focus on debt management, inflation, economic inequality, and climate change as it transitions to the next administration after the national elections in May 2022. — Jenina P. Ibañez

By Jenina P. Ibañez, Senior Reporter

THE PLAN to tax the super-rich would need further evaluation to identify wealth and appropriate tax levels after the Finance department suggested the plan could lead to capital flight, economists said.

Cid L. Terosa, a senior economist at the University of Asia and the Pacific School of Economics, said empirical studies have shown that taxing more than an “appropriate” level is counterproductive.

“I am not saying that it is a bad idea, but I would like to stress that certain challenges have to be addressed first,” he said in an e-mail.

He said the plan must carefully identify the super-rich by defining and measuring their wealth, and determine the appropriate level of tax that would not lead to negative consequences.

House Bill 10253 or the proposed Super-Rich Tax Act of 2021 seeks to impose a tax of 1-3% for wealth starting at P1 billion and beyond. Under the bill filed by a minority bloc at the House of Representatives, the tax would be used to fund medical assistance, education, employment, social protection and housing for the poor.

Finance Secretary Carlos G. Dominguez III has said that the proposal could trigger aggressive tax avoidance schemes and drive investment out of the country.

The risk of capital flight may depend on how the government uses the tax revenues it collects, Asian Institute of Management economist John Paolo R. Rivera said.

“Taxation is also a game of credibility whether tax revenues will be used to improve the conduct of doing business and improve infrastructure, telecommunications, transportation, technology, among others,” he said in an e-mail.

“Of course, in principle, everyone, even the wealthy, would be privy (to) where their taxes go.”

Mr. Rivera also flagged the need for a way to identify the super-rich because this form of taxation requires wealth declarations.

“Income declaration is already a challenge, what more (with) wealth,” he said. “This policy needs further deep thinking and evaluation.”

Mr. Dominguez earlier said the government can only impose a wealth tax if Congress approves amendments to the Bank Secrecy Law allowing regulators to look into bank deposits. He said the government should also sign information exchange agreements with other countries on the movement of wealth, in the absence of a reliable database identifying the country’s richest.

Meanwhile, nongovernment organizations are criticizing claims that a wealth tax would drive out investment.

Lidy B. Nacpil, coordinator of the Asian Peoples’ Movement on Debt and Development, said the tax could fund urgently needed government services as the country faces multiple crises, noting that the country should prioritize investors that pay their fair share of taxes.

“Rather than help convince the super-rich about this measure that they can very well afford to pay, (Mr. Dominguez) is already taking their side,” she said in an e-mail. “He should apply his expertise in finance to develop transparency and regulatory systems to reduce tax avoidance and capital flight.”

Argentina last year passed a wealth tax that allowed its government to raise $2.4 billion by May 2021. The government plans to use the funds for its pandemic response, including health programs and small business subsidies.

In the Philippines, outstanding government debt ballooned to P10.2 trillion last year from P8.2 trillion in 2019 as the state ran big deficits to battle the coronavirus pandemic.

The country’s debt-to-GDP ratio was 63.1% as of September, the highest in 16 years, government data showed.

Tony Salvador, Freedom from Debt Coalition executive committee member, said in an e-mail that a wealth tax would raise much-needed funds to address the pandemic, as it would provide healthcare and food subsidies for the country’s poorest.

“We believe that it will help the economy in the long run and in fact benefit even the super-rich who are obliged to pay this tax,” he said.

Think tank IBON Foundation said the measure would generate P467.1 billion from 2,919 people who have taxable assets exceeding P1 billion. These super-rich account for 0.003% of the population and control 16% of the country’s wealth, it said.

This estimated revenue could fund P10,000 in emergency aid to 18.6 million poor households, provide subsidies for micro, small and medium enterprises to support a daily wage increase of P100 for three months, and hire additional health workers.