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Egalitarian | Federalism, LGUs, and the New Ruling on National Income

The Local Government Units are in a better position under federalism. With the current state of affairs, the LGUs are getting the secondary position for budget, yet are in the business of primary service to the public being the frontline government agencies.

Philippine provinces, cities and municipalities are undoubtedly Internal Revenue Allotment (IRA) dependent. Accordingly, provinces are 72 percent dependent to the IRA, cities are a bit lower with 41 percent, while municipalities at 73 percent.

The dependence to IRA is one thing, and the “just share” of the LGUs in the national taxes is another thing, more so, the requirement of the law of automatic release of the LGU share to them without need of any further action. This is the tenor of the law in Republic Act 7160 of the 1991 Local Government Code.

Records reveal that in 2016, the biggest share of the LGU revenues went to National Capital Region (NCR) accounting for 43 percent of the total income share, while the total expenditures of the said region was reported at 41 percent. Regions 4A accounted for 7 percent of national income share, Regions 3 with 6 percent, Region 6 with 5 percent and all other regions except CARAGA took a share of 3-4% share of the income, while CARAGA with 2%, and ARMM with no record. The expenditures of the Regions went also along the same percentage share as their income.

The stark disparity in the income share was, unfortunately, due to the situs of taxation which was also described in RA 7160 section 150 which declares that thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where factory, project office, plant or plantation is located.

Simply explained in operational terms, the situs of taxation is where the head office is found. The effect will be denying the municipalities and cities which hosted the production plants or factory of the tax resulting from economic activities.

This condition caused the dismal distribution or concentration of income across the country; National Capital Region is getting 76% share of the total local revenues amounting to P96 billion while LGUs are fated to share the remaining 24 percent or equivalent to P23 billion.
Again, and let me underscore that the cause is that most of the big businesses head office are found in NCR, in fact, 86 percent of big businesses of the country have head office in Quezon City, Makati City, Manila, Pasig City and Taguig City.

This situation is changed if the country becomes federal. First, the greater share on the wealth and income of the country will favor the regional governments because powers are effectively exercised by the regional government. In addition, operative law will continue to exist. Such the situation in relation to the increased budget share of the LGUs with regard to the Supreme Court Ruling on the Mandanas/Garcia which set 40 percent share of the LGUs on the national tax revenue.

However, if there is no fiscal autonomy, the LGUs will sit for the mercy of the national government to release the amount and allow them to spend their share on services that their people deserve. Earmarking a budget share does not mean permission to spend rightful budget.

If the country becomes federal, LGUs will have their rightful share under the Mandanas/Garcia ruling, plus their share in the Regional government’s budget taken from the national income.

With all these developments, what is left for this country is to take advantage of the systemic shift to federalism so that all of these benefits will be afforded to the people across the country. Growth, opportunities and income moving away from the NCR to be equitably distributed to the needy regions.

*Author is deeply indebted to Ms. Sandra Tablan, the Executive Director of the League of Provinces for the kind and clear explanation on the subject matter

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