Discretionary Local Taxes Gain Traction

Taxes independently imposed by local governments are in the news. The spark that ignited the interest is a toll scheme introduced by the city of Izumisano for the access bridge to Kansai International Airport, which is located on an artificial island in Osaka Bay. Kawabata Tatsuo, minister of internal affairs and communications, has now given the green light to this scheme.

Hashimoto Tōru, Osaka’s popular new mayor, has also been making waves in the taxation arena. He has proposed an energy conservation tax, aimed at discouraging energy use, as one means to deal with the expected shortages in electricity supply if nuclear reactors are not returned to operation in the wake of the Fukushima nuclear power station disaster. The issue of autonomous local taxation had taken the back seat for a while, but now it seems poised to attract attention again.

Official Blessing for a Bridge Toll

In cases where tax legislation has no provision for a particular tax, local governments have the authority to create a discretionary tax by issuing an ordinance. Izumisano has taken advantage of this power in its plan to add a new component to the toll for traveling over Sky Gate Bridge, the bridge from the mainland to Kansai International Airport. Scheduled to go into effect in October, the plan will add a round-trip levy of ¥100 per vehicle to the existing toll, and it is expected to bring in ¥300 million per year over the initial five-year implementation period.

Discretionary local taxes require official approval. To be specific, the central government’s minister of internal affairs and communications must agree to their imposition. They will be turned down if the minister judges them to be inappropriate for one reason or another, as when they place a major obstacle in the way of the distribution of goods or are out of line with the government’s economic policies.

In the case of Izumisano’s toll scheme, the city suffered a loss of ¥800 million per year in property taxes when the airport access bridge was nationalized a few years ago, and the local authorities were having trouble reaching an agreement with the central government on measures to make up for the lost revenue. The idea of utilizing taxation on traffic over the bridge had been around for a while, but it never made its way off the drawing board. The central government, it came to be thought, was unlikely to agree to any plan. Hence many local officials were pleasantly surprised when the ¥100 levy was approved in April. The scheme, the decision stated, was unlikely to have a serious negative impact and could not be deemed inappropriate in light of the state’s economic policies.

The Local Tax Debate Heats Up

Thus far, the introduction of discretionary taxes by local governments has not been a commonly employed strategy. Previously the central government needed to give explicit approval to any such tax, but in a deregulatory reform of 2000, this was changed to a system of consent. Even so, local government heads remained reluctant to associate themselves with the imposition of a new tax, and proposals were often rejected on the grounds that they unfairly targeted visitors from outside the community or a particular class of residents. The city of Yokohama, for example, had to give up on a plan to impose a sales tax on betting tickets for horse races when it failed to get the central government’s consent.

Revenue from discretionary taxation by local governments in fiscal 2010 (April 2010 to March 2011) amounted to only ¥51.6 billion, a mere 0.1% of total local tax revenue. A substantial portion of that sum, moreover, came from taxes related to nuclear power, such as a levy on nuclear fuels, and this revenue will taper off as long as nuclear reactors remain out of operation. When they need additional revenue, local governments rely instead on enhanced rates for statutory taxes, such as the local income tax called the residents’ tax. Tax laws allow municipal and prefectural governments to raise the rates of these taxes within certain bounds, and this rather than discretionary taxation has become the preferred choice. The revenue collected by this means came to ¥467.7 billion in fiscal 2010. Perhaps the central government has become inclined to take a more flexible approach to discretionary local taxes because a major reason for their unpopularity is the difficulty of securing consent for them.

Debate on local taxes from an angle not seen in the past has also started. Here the talk is mainly about the energy conservation tax proposed by Osaka Mayor Hashimoto to cope with summertime electricity shortages if nuclear plants are not running. This is reported to be a scheme that can raise billions of yen from residents of the Kansai region around Osaka by means of a new discretionary tax. The money raised is to be used to fund incentives for companies and individuals that reduce their power consumption by installing generators or making energy-saving efforts. If the proposal appears likely to be accepted, the Union of Kansai Governments will probably consider adopting it for all the prefectures in the Kansai region.

Some observers have been arguing for a number of years that discretionary taxes are best employed to accomplish specific policy objectives rather than just to bring in additional revenue. There is nothing in the discretionary tax system preventing its use for the creation of special-purpose taxes. Izena, Iheya, and Tokashiki, three villages on remote islands in Okinawa Prefecture, employ an environmental levy as a discretionary tax. They collect ¥100 from each visitor per trip and use it to beautify the environment and maintain tourist facilities.

The ruling Democratic Party of Japan has called for reform to promote “local sovereignty,” but it has not in fact paid much attention to measures to realize this objective, such as transferring control over revenue sources to strengthen local taxation. The tide toward providing greater freedom to local tax systems is nonetheless strengthening. This can be seen in the squabble in Nagoya over a reduction in the municipal income tax, which has culminated in the implementation of the tax cut.

While the central government has embarked upon further deregulation of discretionary local taxes to relax the requirements and approval procedures, the talk in local assemblies and public offices about improving tax systems has tended to be mere lip service. But now, thanks to the jolt of the “Izumisano shock,” reverberations are likely to echo around both national and local halls of power.

(Originally written in Japanese on May 3, 2012.)