Equalizing fiscal relations in federalism

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FILIPINOS may not realize that the fiscal relationship between their LGUs and the national government can only be described as grossly unjust. Maybe even that would be an understatement and yet it isn’t really that surprising given the long reliance of a colonial, extractive-oriented, unitary government (colonial masters used to be foreigners and since independence has shifted to Malacañang occupants controlled by the elites) enshrined in our present centralized unitary political system; hopefully, not much longer with the possible shift to federalism as envisioned by and the coming of President Rodrigo R. Duterte.

To fully appreciate this, consider that Malacañang under current tax laws has exclusive rights to over 80 percent of all (national and local) taxes of all sorts while less than 20 percent are within the rights of LGUs to collect and thus in spending, even accounting for Internal Revenue Allotments, the centralized national government accounts for over 80 percent of all (national and local) government spending.

With budgets and policy and project approval for public and private projects centralized in Malacañang and its line agencies, it is no wonder that elite-capture of government has always been the name of the game. Again, this has apparently changed as evidenced by the Cabinet members of Duterte.

Malacañang has rights to all VAT collections, customs, corporate income and personal income taxes; all line agency governmental fees, no matter where located for the use of ports, terminals, etc. LGUs have been confined to realty taxes, local business fees and local permits, and are allowed by law to create new sources of local taxes. (However, given the proximity of the “taxer to the taxed” and plus only a three-year term, you can appreciate the difficulty in raising local taxes. In a federal setup, local taxes are set at the regional level, which puts a good distance between the “taxer and the taxed.”); the result of this unitary fiscal madness? Let me count: Napoles scams, cookie-cutter projects, patronage building with local feudal lords and, finally, dynasties. Yes, the very fears of what a federal setup would bring are ironically embedded in a unitary fiscal system, Philippine style. That style is still colonial. Every year dynasties become stronger and, clearly, this is tied to “balimbing” politics to get into the “budget action” with the party in power, while the defenders of the status quo (mostly Manila-based) unconsciously mislead by ascribing the ills of unitarism to federalism.


Fiscal relations are, thus, grossly unequal between the local and the national in collecting and spending the people’s money for governance. This is addressed by federalism as in the United States by the states (regions) having legal claim to our equivalent of VAT in the form of sales taxes, and also have a share that they determine from personal and corporate income taxes. Thus, in the US there is justice in this relationship with the federal government collecting and spending about 55 percent and the states 45 percent (against the Philippines 80 – 20 sharing). In communist China, the central government only spends about 30 percent of all people’s money for governance and the provinces spend 70 percent.

Tax potential is not equal by region in any national political system (even in the EU, Portugal is fiscally supported due to its poorer status as are poorer states in the US are beneficiaries of national transfers called “Internal Revenue Allotments”) and, therefore, government, now and in a federal system, has internal transfers of fiscal resources; first within a region and then nationally between regions through the federal government so that no place is left behind.

Simplistically, sales tax or VAT will be retained within the region (the new LGU) while income taxes (personal and corporate) continue to be held by the national government with direct shares (to be determined by experts) to the region. All regional district offices of the BIR within a region will become the Department of Finance of that region, and it will directly retain the VAT and its share of income taxes, and only remitting to Malacañang the balance due. From this transfer to the national, internal revenue allotments are shared with poorer regions for their poorer provinces. This way, no one is left behind.

Therefore, the main inherent fiscal reform in a federal system is more equitable and better developmental relations between the local and the national. Local should empower communities to move on socio-economically through its greater retained fiscal resources and the national defends the country and the currency, and sets the directions for sailing the ship. The locals are the oars in their own styles and cultural foundations, resulting in a diverse expression of regional competitiveness unseen in the centuries of unitarism in Philippine history.

Only from the equitable sharing of the country’s fiscal resources, through federalism, can we expect the regions and the provinces to wake up and take area-based planning seriously as, now, the money to make plans happen will be available. Instead of one head (Malacañang) planning and using up to 80 percent of the people’s money, we will have 17 regional governments (if we just simply convert existing regions to the regions in a federal system) doing that kind of spending, which is closer to the people and, therefore, becomes a bit more accountable, lessening corruption to boot.

Justice demands that federalism and any system toward better sharing of fiscal resources should be implemented as soon as possible, even if just by an Executive Order, delegating some presidential powers to existing regional bodies like the Regional Development Council as discussed in a previous column last May.

The author is a member of the Board of Advisors of the Centrist Democracy Political Institute (CDPI). He is also co-convenor of the Subsidiarity Movement International, as well as the Federalist Forum of the Philippines. He advocates the bottom-up development model and proper decentralization, and the strengthening of regional governance. He served for 12 years in the Regional Development Council, of Central Luzon, as chair of its economic committee. He was a consultant at Philippine Alternative Fuels Corp. (PAFC) and was on the Board of Trustees of the Haribon Foundation.

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1 Comment

  1. The question is given the political culture existing in the entire country and the level of awareness of the electorate, are we ready to move to federalism? would it really empower the people or the dynasties? While fiscal efficiency is an important concern, there are more issues such as unity and preservation of the integrity of the entire nation.

    Shift to a Parliamentary government-A big Yes, shift to Federalism-No, not this time.