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Have you ever heard of the term "hometown tax"?

Furusato nozei is a system whereby donations of over 2,000 yen to any local government can be used to deduct individual resident and income taxes. The system was originally established in 2008 during the first Abe administration as a new initiative to promote the correction of disparities in tax revenues between regions and for local governments struggling with declining tax revenues due to depopulation and other factors. In the 2011 Great East Japan Earthquake, many people made donations to support the disaster-stricken areas, and 64,914,900,000 yen was raised, about 10 times the amount from the previous year.

Recently, the term "hometown tax" has been widely featured on television and in magazines, so opportunities to hear it have increased, but there are probably many people who don't know much about it.

Now, let us briefly introduce the features of this "Hometown Tax" system.

First of all, although the name says "tax payment," it is actually a type of donation deduction. It is a system that allows individuals to receive a certain amount of deduction from their resident tax and income tax when they donate more than 2,000 yen to any local government (prefecture, city, town, or village) in the country. In other words, in effect, part of the prefectural and municipal taxes that you currently pay will be transferred to the local government to which you donated.

Although it is called "Hometown," it does not have to be your hometown or place of residence, and you can donate freely to the local government you want to support. Many local governments also allow you to choose how your donations are used. For example, in addition to "supporting reconstruction efforts," which many people did after the Great East Japan Earthquake, you can also donate to policies or events that resonate with you, such as "I want to protect the natural environment of the local government where I lived during my university days" or "I want to protect and nurture the traditions and culture of my hometown."

Many local governments also offer special gifts such as local specialty products and folk crafts to those who make hometown tax donations. One of the great attractions of hometown tax donations is that you can donate to a city or village that has a specialty product that you want. (Figures 1 and 2)

In the fiscal year 2013 taxation (covering donations made in 2012), hometown tax donations have increased compared to the year before the Great East Japan Earthquake, and it is believed that the popularity of local specialty products has led to a further increase over the past one or two years. With this popularity as a backdrop, the Abe administration, which has made "regional revitalization" a key issue, has raised the upper limit of the hometown tax deduction this year and expanded the system.

As you can see, hometown tax has many features and benefits, but it has gradually deviated from its original purpose of "eliminating the decline in tax revenue due to regional disparities and depopulation" and "supporting the region where you were born and raised or where you have been looked after." In particular, it seems that the "competition for local specialties between municipalities" has become overheated, with some municipalities offering to "present an entire cow" to those who make large donations in recent years. Indeed, for the municipalities receiving donations, even if they incur the cost of the local specialties to be presented and administrative costs, if they receive more hometown tax donations than that, the municipality's name recognition will increase, and there may be sufficient benefits. But is this really the way it should be?

Let us now consider the essence of local taxes.

You may know that there are "national taxes" and "local taxes." Of these, national taxes are based on the idea of the "ability to pay principle." The ability to pay principle is the idea that tax should be levied according to the economic ability of the taxpayer. For this reason, the higher the income and assets of a person, the greater the tax burden, and as a result, an "income redistribution function" is expected. The progressive tax system is designed to realize this idea.

In contrast, local taxes are based on the idea of the "benefit principle." The benefit principle is the principle that tax burdens should correspond to the benefit of administrative services provided by the national and local governments. In other words, the idea is that "taxes are fees for purchasing administrative services." Naturally, the amount of tax paid for the same administrative services is the same regardless of income or assets. In the case of local taxes, the services provided are limited to a certain geographic area, making it easy to see the relationship between benefits and burdens, and so the system is based on the benefit principle.

In light of this principle of local taxes, "benefits and burdens," potential problems with the "hometown tax" system become apparent.

As mentioned above, local taxes are based on the principle that they are paid as compensation for administrative services provided by local governments. In contrast, those who make hometown tax donations have their resident tax deducted, so they pay taxes (actually donations) to local governments from which they do not receive administrative services, while paying only a portion of the taxes they should pay to the local government in the area where they currently live, even though they are receiving administrative services. If many residents start making hometown tax donations and the tax revenue of the local government in which they currently live decreases, the local government will have to lower the level of administrative services or find other sources of revenue to maintain the level of administrative services. Of course, raising taxes is also an option. The system is a little more complicated, and 75% of the reduced tax revenue is covered by local allocation tax, so the impact is mitigated, but non-granting organizations, mainly cities that do not receive local allocation tax, will face this problem.

This situation is clearly detrimental to taxpayers who pay the full amount of their resident tax in their current place of residence (i.e., those who do not make hometown tax donations). Moreover, the fact that such a disadvantage arises unilaterally due to the will of others is a problem that shakes the very foundation of the local tax principle of "burden according to benefit."

Personally, I think that as long as "Hometown Tax Donation" is carried out within the scope of its original purpose of "eliminating the decline in tax revenue due to regional disparities and depopulation" and "supporting the region where you were born and raised and the region where you have been looked after," it is a positive thing because it contributes to the development and promotion of local industries. In fact, the problem of many young people who grew up in rural areas leaving for the city to continue their education or find a job is serious. Even if the costs of education are covered, talented people flow to the city, and as a result, the tax revenue of urban municipalities increases while the tax revenue of the municipalities that nurtured these people decreases... This is a troubling situation for rural areas. I can fully understand the desire for people who have left the prefecture to use the hometown tax donation to "pay it forward when they get older."

However, what would happen if large cities, where donations are not collected and deductions are only increasing, began to seriously enter the "Hometown Tax" service competition, backed by their strong financial power? It cannot be denied that the benefits of donating to local governments will decrease, and the gap between cities and rural areas may further widen. Even if donations temporarily increase due to the luxury of local specialties, it is questionable whether this is sustainable.

The media is full of information focusing on luxurious benefits, such as "Recommended for tax saving measures!" and "Ranking of municipalities with the best cost performance!" However, if this trend becomes too heated, it will end up harming well-intentioned taxpayers.

The "Hometown Tax" system was started from the desire to "contribute to the hometown that raised me." I hope that it will be managed appropriately and that it will be a sustainable system that does not lose its original purpose.

(Published in 2015)