Gifts for Donations: Winners and Losers in “Hometown Tax” Program

Politics Economy

The furusato nōzei (hometown tax payment) program began in 2008 as a way for small regional communities to earn extra revenue through donations from former residents, collected in the form of tax payments earmarked for the regional governments by the taxpayers themselves. It became wildly popular, and in fiscal 2015 donations ballooned to ¥165.2 billion, or 4.3 times the amount for the previous year. But as municipalities have sought to attract payments from an ever-broader taxpayer base, offering lavish thank-you gifts to donors who may never have even visited the area, the scheme has strayed a long way from its original vision.

No Tricky Paperwork

The program was originally championed by Suga Yoshihide, now chief cabinet secretary, when he served as minister of internal affairs and communications in the 2006–7 Abe Shinzō administration. Under its terms,most of the donations can be deducted from local taxation. For example, the author, who lives in Setagaya, Tokyo, might make a ¥30,000 donation to Tateyama, Chiba Prefecture, where he was raised. This would effectively cost him ¥2,000, while the remaining ¥28,000 would be covered by deductions to income tax and residence tax, meaning reduced revenue for the national government, Tokyo, and Setagaya.

Annual donations received through the hometown tax payment program averaged around ¥10 billion in the first six years to 2013. The figure jumped to ¥30 billion in 2014. Then, with the establishment of a special rule in April 2015 doing away with paperwork by making the filing of a tax return unnecessary, the number of donors exploded.

Big Gains for Donors

The primary reason for the popularity of the hometown taxation program is the thank-you gifts donors receive for their donations to local municipalities. The Ministry of Internal Affairs and Communications reports that about 40% of donation receipts go to covering the cost of thank-you gifts. Once publicity costs are factored in, about half of the donations received are used for gift costs.

There is no requirement that donations must be made to a donor’s former home. Many local municipalities have adopted a strategy of providing thank-you gifts to encourage donations from people with no connection to the municipality. For many donors, nostalgia is the last thing on their mind. Rather, they are using the hometown taxation program to achieve the greatest possible personal benefit.

How rewarding is the program to donors? Total costs may vary depending on a range of factors, including the taxpayer household's income level and number of dependents, but the following chart gives one example. If a two-income family makes donations totaling ¥67,000 to five local municipalities and applies for a ¥65,000 tax deduction, the effective donation of ¥2,000 will yield beef, rice, and other goods totaling ¥34,500 in value.

Benefits of Making Hometown Taxation Donations

Recipient Donation Thank-You Gift Gift Value Effective Cost
Miyakonojō, Miyazaki Prefecture ¥11,000 1 kg of sliced Miyazaki beef ¥6,000
Kaminoyama, Yamagata Prefecture ¥10,000 10 kg of the Tsuyahime brand of Yamagata rice ¥5,000
Abashiri, Hokkaidō ¥10,000 One whole salmon, salted and sliced ¥4,500
Soni, Nara Prefecture ¥10,000 One box of Miwa sōmen noodles ¥3,000
Naha, Okinawa Prefecture ¥26,000 Travel coupon ¥6,000
Total: ¥67,000 Total: ¥34,500 ¥2,000

Many thank-you gifts consist of locally produced rice or other agricultural and fishery products. They can also take the form of beer, bicycles, or golf equipment produced at local factories. Travel coupons have been used as thank-you gifts through tie-ups with travel agencies. There really is no limit to what can be offered. Despite the costs associated with soliciting donations, these donations can contribute to the revitalization of localities if they benefit local industries and tourism services.

Internet companies creating websites that introduce thank-you gifts are tying up with local municipalities eager to collect donations. These websites make it easy for potential donors to compare and examine the gifts and to make their donations by credit card. Through these developments, the number of donors and the total revenue from donations are expected to continue growing for the hometown tax payment program.

Is Program Actually Working?

Kamishihoro in Hokkaidō is often cited as a success story in soliciting donations from all over Japan. While the town’s population is less than 5,000, it was one of the first to accept donations by credit card. Its thank-you gifts of locally produced beef and ice cream have proven popular, and Kamishihoro collected nationwide donations of about ¥1.0 billion in fiscal 2014 and about ¥1.5 billion in fiscal 2015.

Kamishihoro’s local tax revenues (mainly residence tax and property tax) were about ¥690 million in fiscal 2014, far less than its hometown donations. The town used hometown donations to create a fund for addressing the issues of childcare and a falling birthrate and eliminated charges for using certified childcare centers for a period of 10 years from fiscal 2016.

As the winners and losers of the hometown taxation program become evident, questions are being raised about whether the program is actually promoting the revitalization of localities. Nagasaki, with a population of 550,000 people, is one city that is not benefiting from the hometown taxation program. As disclosed at a June city council meeting, the city recorded a deficit of about ¥89 million in its hometown taxation budget in fiscal 2015. While the city received 1,801 donations totaling ¥72 million, this was exceeded by the ¥116 million decrease in tax revenues ensuing from the 2,692 donations of Nagasaki citizens to other municipalities. In addition, thank-you gifts and delivery costs gave rise to expenditures of ¥45 million. interviewed Yamaguchi Masayoshi, a city councillor for Nagasaki, who questioned the effects of the hometown tax approach at a council meeting. “The program appears to produce outcomes far removed from its original intent,” he stated. “As long as the program continues in its current form, however, Nagasaki will need to collect more hometown donations.” The city intends to strengthen its publicity efforts, such as by holding events in Tokyo, and will aim to collect donations totaling ¥210 million in fiscal 2016.

Morinobu Shigeki, professor of Chūō University’s Graduate School of Law and an expert on tax systems, indicates that deducting donations from income is a widely followed international standard. The hometown taxation program stands apart, however, since the program enables donors to realize gains in the form of gifts by deducting donations from taxes. He argues that, rather than competing with thank-you gifts, it would be better for municipalities to compete in the area of policies for achieving the revitalization and invigoration of localities.

(Originally written in Japanese by Ishii Masato of Banner photo: Investment and financial magazines featuring articles on the hometown taxation program.)

taxation municipalities Donation local communities