The LGC's Taxing and Revenue-generating Measures: Who Gains and Who Loses?

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.._r.-October1992 .....

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ISSN0115-9097

FISCALDECENTRALIZATION ANDTHELOCALGOVERNMENT CODE OF1991

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Editor's Note _temmive and promising. Looking back, one x_membem numerous avenues8 to8rowtk werehow otm_ bycontinin "walls" that only stagnated the economy rather than united the people. Alas, ff the

by Rosario G. Manasan ResearchFellow,PIDS

"k_s _ ant_," =,=ot,_,_,e ,._vt_=_aR,.a_,_m,_th,=_._ily singing the tune of "Divided We S=nd,

he enactment of the Local Government Code(LGC) T of 1991 is perceived by many as a milestone towards increased decentralization and 1ocal autonomy.

The new Code signals the transfer of the delivery of basic services and certain . regulatory functions from the national government to the local

Department of SocialWelfare and Development, Department of Environment and Natural Resources, Department of Public Works and Highways, Department of Tourism, and Department of Education and Sports.

government units (LGUs). In particular, the LGC reassigns to LGUs some of the powers, functions and responsibilities until recently discharged by the following national government agencies: Department of Agri-

ment to the local government is meaningless if the local units are not financially independent of the central government.

Thus, hand-in-hand with the transfer ofexpenditureresponsibilitiesto

culture, Department

y /' /t

Decentralization of authority from the national govern-

of Health,

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ever, may not be easily fox_mming deAutonomy in local affairs, howsvi= decentralization-atleast,it will not be served in a silver platter.

In= tt_ght-provo_,hay eni/tled_lDecentral/zaUonandthe l_z Z,o<at.Gov=rmentCoa=," _.Roeario Manasan, PIDS Research Fellow, ,aar_ howsomeofthe _o_i_ of theCode,tf_ thefL, t_mz ]_,aao. of ]zeal govm-mn_t traits _s).

Sheslm_ h_a_l__o_t_coa_ ,ndcomp, _th=r_l=with=_it_tio_ where the r Code is not affected. Where Sen_tio_=_otb_made,.he_e= epecittcaata.

She_thatth_t_'U. have constant levelof tax oollection and that the increase (or decrease) in tax base

_t_Uth_ht_to_i_l_at.of_wa_ The .t_dyisbrokenuptntotwo_ at,des, each one focusing on a pa_r .p_o_a.=._limpaaoftheCoae o_th_X_-_.

The research was mmpleted dmmghtheassbtance°ftheUnitedSlat_ Agency for International Development G/SAID) by the author while she was on

member of the Local Development Assbtance ProgramMonitoring Teamop- a leave from PIDS and simultaneously

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United WeFall."

Development, Inc.'s contract with USAIDManila. The views and findings conrained in the study ave those of the author and do not necessarily reflect those of USAID or the ARD. and upg3"ade the publication date of the Deve_m_ent Research News,the Editorial Staff has decided m defer the update in aneffort to adjust stories Io Meantime, the following issue, beginning

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DEVELOPMENT RESEARCH NEWS

September- October1992

FiscalDecentralization...

(Frompage 1)

tinent legislations (Local Tax Code).

like PD 231

one hand, and the cost of devolved functions, on the other, and the distribution of the IRA

the L_;Us, the LGC, in principle, provides LGUs with a higher share in the national taxes with greater certainty so that they can effectively perform their new tasks. It also broadens the taxing and revenue-raising powers of the LGUs relative to earlier per-

In the following pages are two related articles analyzing some of the provisions of the 1991 LGC as theyimpact on the financial position of LGUs. The first one deals with the balance between the increment in the Internal Revenue Allotment (IRA),on

across different levels of LGUs. The second talks about thevarious revenue-generating and taxing powers of the LGUs. It is hoped that the analyses would be useful in identifying the strengths and weaknesses of the LGC. O

LGU'sSliceofInternalRevenue Allotment fromtheNationalPie Through the 1991 LGC, LGUs are entitled to a share in the gross national internal revenue taxes based oncollectionsin the third year preceding the current one, at a rate of 30 percent in the first year of LGC's implementation, 35 percent in the second year, and 40 percent in every year thereafter. However, in the ev_mt that the national government it_urs an unmanageable public sector deficit, the internal revenue allotment (IRA) may be reduced, but in no case shall it be less than 30 percent of net Bureau of Internal Revenue (BIR) tax receipts,

oftheLGC'simplementation, theIRA shares of LGUs will almost triple relative to the previous year's level.

However, under the LGC, the various allotments and aids from the national government to LGUs that comprised what used to be known as National Assistance to Local Government Unit (NALGU) funds are now integrated with the IRA. Thus, it is more appropriate to compare the 1992 IRA with the 1991 NALGU level.

In the old set-up, Presidential Decree (PD) 1741 prescribed that the IRA should not exceed 20 percent of net revenue and that the internal IRA share of anytaxes par-

(_) Oo

The full implementation of the 1991 LGC implies that IRA to LGUs in 1992 should equal P24.4 billion. While this represents a hefty 111.8 percent increase over the P8.5 billion IRA in 1991, in effect, it is a mere 51 percentincrease over the P16.2 billion NALGU in the same year.

Moreover, billion ment in the the totalP8.2 national aidsincreand

ticularLGU should not increase by

/i--.

allotments .toLGUs under this sce-

__,

P16.2 billion in 1991 NALGU) is just about half of the initial expected nario billion (P24.4 billion 1992 IRA less P15.9 (P24.4inbillion in 1992 IRA less P8.5 billion in 1991 IRA).

year. more than 20 percent in any Understandably, the given 1991 LGChasgeneratedveryhighexpecrations among local government officials and the general public Since the amount allocated for IRA in 1987-

conventional wisdom is that with the IRAofpegged percent the of percent net BIRattax30receipts, gross BIRcollections in the first year

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If one assumes that 40 percent (the maximum share prescribed

were appropriated for IRA in 1992, the 101.1 percentofincrease falls year thereafter) BIR taxstill receipts short of what is anticipated.

DEVELOPMENT REI;EARCHNEWS

Se3tember-October1992

IRAand the Cost

funded, pre-LGC/_-

of Devolved Functions

80_.NO

Executive Ordcs (B3) _ states that in 1992, national government agencies(NGAs) should shoulder all costs of devolved functions, whetherornotsaid functlonsare shifted to LGUs within the year.From 1993onwards,

20_ m^ for LGU8 Pre-LQC (P.D. 1741)

ti_)ugllb _

costs will be the sole responsibility of LGUsa_d wiUhave tobe funded from

so_.,o

4o_ m^ forLOU8 Post-LGC (based on maxImum share allowed)

Comparisonof IRA Share(GNIRT) of the Gross National InternalLGUs' RevenueTaxes Before and After the Looal GovernmentCode (LGC)

their augmentedIRA sharesand locally generated revenues.

rangay expenditures (comprising salariesof barangay officials and outlays for concreting of barangay roads) by P4L]billion. Howevcs, if only 30 percent of gross BIRtax revenues or P30.8 billion is appropriated for IRA in 1993,provinces, municipalities and cities combined will suffer arevenue shortfall equal to P3.6 billion while barangays will posta surplus of P2.9billion.

To find this out, the following approach was taken: First, the 1991 level of NALGU funds was viewed as representing the centrally funded portion of LGUs' budgets that is necessary to maintain their services at pre-LGC levels. Second, the buc_gets of NGAs corresponding to functions and responsibilities tobe transferred to LGUs were used as a benchmark figure for the actual cost of devolved functions. Third, the baseline expenditure levels derived were adjusted for inflation (assuming an annual inflation rate of 10%)so as to maintain their values in real termsin 1993. Fourth, the inflation-adjusted, projected expenditure of LGUs on both new and old functioms was compared with the projected IRA levels in 1993. Finail},, since no functions will be devolved from NGAs to the barangays, the analysis segregated barangays

Independent estimates, meanwhile, EO 507 estimates thecostof placethecostofdevolvedfunctions devolvedfunctions, excluding thecost atP13billion.

Usingthisestimate, of construction and maintenanceof non-barangay LGUs will suffer ashortpublicschoolbuildings, atP10 billionfallofPl.lbillion orPS.2billion ifthe in1992.IftheP1.5billion budgetallo- 1993IRA is equalto35 percentor cated for school buildings in the 1992 30 percent, respectively, of national General Appropriations Act (GAA) is internal revenue taxes. added, the total cost of devolved functions amounts to Pll.5 billion. AssumAssm_g that40 percent (the ing 35 percent of gross BIRtax receipts maximum share allowed by the LGC or P36 billion will be appropriated for for 1994 and everyyear thereafter) of IRA in 1993, 80 percent of this amount BIR tax receipts is appropriated or P28.8 billion will represent the com- for IRA in 1993, provinces, municibined share of all provinces, cities and palities and cities combined will have municipalities of the IRA while the re- a surplus equal to P4.7 billion based maining 20 percent or P7.2 billion will on an Pll.5 billion official estimate of go to the barangays, devolved functions or P3.1 billion based on P13 billion independent Table I shows the estimates of estimates of the true cost of devolved the expenditure responsibilities of LGUs functions. Barangays,meanwhile, will vis-fi-vis the new IRA shares in 1993 have a surplus of P5 billion. under three percentage share scenarios (i.e., 30%, 35%and 40%) and based on Moreover, while the 1993IRA both official and independent estimates share of provinces, municipalities and of the costs of devolved functions in cities appear to be sufficient to fund 1992. Using official estim.ates of the their new and existing expenditure benchmark cost of devolved functions, responsibilities at the aggregate based the combined IRA share of provinces, on official estimates of the cost of demunicipalities and cities will exceed volved functions, actual data at the thesumoftheinflation-adjustedcostof field level from a number of LGUs devolved functions and pre-LGC ex- show that lower-income class LGUs penditure levels of LGUs by P0.6 bil- will tend to have financial difficulties lionCoasedon35%share)whiletheIRA as a result of the LGC's devolution

from other LGUs.

share ofbarangays will exceed centrally

Giventhisperspective, will theamount allocated forIRA less thecostsofdevolvedfunctions of LGUs beginning 1993 match the. amount Ofadditional resources transferred to LGUs?

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........ 40%

I_: :3o% IRA

33.68

: ...........

4,71:

::::::::::::::::::: :::!: :: :o:26::: ,.change in total _tiba Ofmaximum allowable tax tares 1993. it is fl-_edifference:: iOn:and the inflation:adjusted i992 level: SEFrevenucs are iy be:used exdusiVelyfor cxluatiOn pr6:gramsi : i:

value

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accrue tOprovlnce (25%);