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Opinion

Tax sharing in the ConCom’s draft charter

03 Sep 2018

THE CONSTITUTION drafted by the Consultative Committee to Review the 1987 Constitution (ConCom) had drawn negative reactions, which went into a high crescendo with regard to the sharing of national taxes between the central government and local governments in relation to their responsibilities and functions. Oddly, this was initiated by certain Cabinet secretaries themselves. This was followed with fanfare by the business community.

I earlier described the draft constitution as not federalism at all. I still do. I equate federalism with a high level of local autonomy. In fact, this was the battle cry of the proponents when they first advocated federalism two years ago. They even mentioned that the states will levy and collect all the taxes and share 20% of their collections with the central government for its use. That did not happen.

But that is exactly the clearest symbol of a high-level local autonomy: the local government’s power to levy its own taxes to finance its own overall development, paving the path for its own destiny within the bounds of the federation. But the succeeding events did not move towards that end—the center continues to impose all existing national taxes, except for a few low sources of revenue that were ceded to the regions.

I recognize that the draft constitution consolidated adjoining provinces into regions, created a representative unicameral regional assembly and a supreme court for each region, provided restrictions to political dynasties, and introduced political party proportional representation. But these do not federalism make.

When one compares the enumerated functions and responsibilities of the regions in the draft constitution with those in the existing local government code, nothing much has been added. The wordings, of course, are different. Necessarily, the provisions in the local government code are more detailed. A diligent provincial government would have embraced the powers listed for the regions in the draft constitution as its responsibility except, of course, for the new powers that were added pertaining to economic zones and the justice system and, perhaps added for emphasis, indigenous peoples’ rights and welfare, and culture and language development.

Much of the powers remain with the central government. Even basic education was clearly labelled as a responsibility of the center, which I would think includes procuring physical things such as school buildings and text books, paying teachers’ compensation and, if we decide to get into it, assisting poor students with free meals and transportation. And so with the conduct and control of local elections.

There is clearly a preference towards the center: in case of dispute or conflict in the exercise of shared powers, the federal power should prevail. Reserved powers (those not exclusively assigned and those not shared) are vested in the central government. I would think those powers would include regulatory powers over the environment, natural resources, communications, and air and sea transportation. I read these to mean a hesitation to give more autonomy to the regions.

On paper, the increased allocation to the regions of 50 % of all tax collections should not have aroused so much brouhaha, because the increase is only 10 percentage points from the 40 % already provided in the existing local government code. Of course, the present calculation does not include 40 % of customs duties, which the Supreme Court recently ruled must be included.

To get a better understanding of the issue, let’s look at the numbers. The basis for calculating the IRA has a three-year lag. This means that the IRA for 2018 was calculated based on actual tax collections in 2015. The IRA for 2018 has already been determined at P523 billion (obtained from the DBM website; all subsequent base numbers were obtained from the websites of the concerned government agencies) which is equivalent to 36.3 % of the 2015 BIR tax collections of P1,441 billion. This percentage is quite close to 40 % (there were non-cash items in the BIR tax collections which were excluded in the calculation). This IRA does not include customs duties (let us ignore franchise fees which must also be included). Adding 40 % of the 2015 customs duties collections of P368 billion, the total 2018 IRA would have been P670 billion.

Let’s move forward to the draft constitution which provides for 50 % allocation to the regions. In addition, it provides for an equalization fund of 3 % of total tax collections. In a separate recently passed law, the Bangsamoro is given a block grant of 5 % of total tax collections. There is an issue as to how these two parts (3 % and 5% ) should be dealt with in the computation—whether to deduct them first from the 100 percent (let’s call it Case A) or to deduct them from the 50 % share of the region (Case B).

Let us assume first that the same three-year lag applies (Assumption 1), which is clearly the case for the Bangsamoro block grant, as provided in the covering law. Under Assumption 1, and combined with Case A, the total share of the regions including Bangsamoro is P977 billion, or an increase of P454 billion or 87 % from the actual 2018 IRA of P523 billion (not including customs duties). Under Assumption 1, Case B, the total share of the region goes down to P905 billion (exactly 50 % of total tax collections in 2015). This amount represents an increase of P382 billion, or 73 %.

The language of the applicable provision in the draft constitution appears to indicate that the sharing has to be based on current tax collections. If so, this will be a big leap. This is likely the view taken by government economic managers in their reactions. Let us see how the numbers fall by using the tax collection targets of the BIR and BOC for 2018 –P2,039 billion and P598 billion, respectively, or a total of P2,637 billion (Assumption 2). Under Assumption 2, combined with Case A, the share of the regions, including Bangsamoro, would amount to P1,424 billion, or a whopping increase of P901 billion, or 172 %, over the actual 2018 IRA. Using Assumption 2, Case B, the share of the regions would be P1,319 billion, including Bangsamoro, resulting in an increase of P796 billion or 152 % .

Clearly the outcry is understandable—the result of any of the combinations shown above is clearly out-of-bounds for the central government compared with present level of IRA.

Let’s take a look at the side of the regions. Under Assumption 1, Case B (tax collections of three years ago divided evenly between the center and the regions), the combination that shows the lowest amount of region share, the total region share of P905 billion is equivalent to an average share for the 18 regions of P47 billion per region (after deducting first the 3 % equalization fund). The actual distribution among the regions will show a wide range (based on geographical area, population, and equal sharing), which clearly would result in a smaller share for the poor regions, except for Bangsamoro. But even this combination may not be the acceptable choice. It would likely be lower—an amount between the present level of IRA and the result of this combination. As such, would this region share level achieve the vision of the framers of the draft constitution?

Unfortunately, the regions do not have any other meaningful revenue source. Double taxation is not allowed under the draft constitution, which means the regions cannot impose any tax that is the same or similar to those imposed by the center. In a sense, they are in a straitjacket, fully dependent on the central government for much of their income.

When evaluating the choices of sharing the total tax collections between the central government and the regions, the evaluation should include the effectiveness of the practice of tax sharing. We have been applying that practice for some time now. We now have a long experience to be able to know whether the country is getting good value for the allocated money. The danger I think is that the local government may see it as easy money and that it is not accountable for its use to anyone and, therefore, it may not utilize such money for more effective use. The local government did not raise the money from its own local citizens and, therefore, those citizens may not be conscious of requiring the local government officials to make an accounting to them of the use of the “extra free money” during election time.

In effect, we are already practicing “federalism” of the kind embodied in the draft constitution since the advent of the local government code in 1991 that decentralized the government.

In whatever way or form the country moves forward in amending the present Constitution, the draft constitution embodies several commendable reforms that we should adopt: the restrictions of the political dynasties (which, I believe, should be made more restrictive), the introduction of the political party proportional representation (the proportion of which should be made higher than the 40 or 50 percent threshold stated in the draft), the reorganization of the Senate, the reorganization of the local governments into larger geographical areas (regions), and the representative unicameral regional assembly.

Perhaps, in the draft constitution or any similar alternative draft,the terms “federalism,” “federal,” and “federated” need to be reconsidered and dropped. They are neither necessary nor apt. They just mystify the mind and create a fear of the unknown.

 

Benjamin R. Punongbayan (ben.buklod@yahoo.com) is the founder of Punongbayan & Araullo, one of the Philippines’ leading auditing firms.

 

 

 

As Published by BusinessWorld dated 03 September 2018

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