Hometown tax donation system

The hometown donation system introduced in fiscal 2008 provide tax deductions to people who donate money to a local government of their choice. While the program, known in Japanese as furusato nozei, was originally intended to let people support their native place in rural areas — supposedly in dire financial condition due to depopulation and other woes — municipalities across the country are now busy competing with each other in offering attractive gifts in order to get more donations. Donors meanwhile have come to view the scheme as a cheap way of receiving alluring prizes. There is also criticism that the program is being abused by the wealthy as a tax dodge, since the higher the donor’s income, the bigger the tax break. In reviewing its various problems, the government should consider abolishing the program if the problems can’t be fixed.

Under the system, people making a donation to a prefectural or municipal government of their choice get a deduction in the residence tax they pay to the municipality in which they currently live and the income tax they pay to the national government. If the donation minus ¥2,000 falls within a certain ceiling — which rises as the donor’s income increases — the tax payment is reduced by that sum.

After hovering around ¥10 billion in the initial few years, the total amount of such contributions grew to ¥14.5 billion in fiscal 2013 and ¥38.8 billion in fiscal 2014. It then surged to ¥165.3 billion in fiscal 2015, while the number of donations jumped 3.8 times that year to 7.26 million. That spike was mainly attributed to a move by the Abe administration to nearly double the ceiling at or below which the donation minus ¥2,000 will be deducted.

The program has reportedly contributed to disaster reconstruction, with large numbers of people donating to municipalities in areas devastated by the March 11, 2011, Great East Japan Earthquake and tsunami and the Fukushima nuclear disaster, as well as the April 2016 Kumamoto earthquakes.

But the practice by municipalities to compete for donations with gifts has created problems. According to a survey conducted by the internal affairs ministry that was released last year, prefectures and municipalities spent ¥63.3 billion — equivalent to 38 percent of the donations they received — in fiscal 2015 to buy the gifts they handed out to donors. The total cost of such gifts surged to ¥79.3 billion, or 48 percent of the donations received if related expenses are included. This means municipalities ended up with only about half the donated amount for use on their administrative projects and services for local residents.

A recent Kyodo News survey indicates that while local governments expect the donations in fiscal 2016 to increase 28 percent from the previous year to reach ¥200 billion, they estimate their net revenue will rise by only 17 percent to ¥114 billion because of the cost of the gifts. The eventual sum that will be available for municipalities will be even lower since they need to cover other expenses, including fees to operators of portal sites listing the gifts. According to the survey, 72 percent of the local governments said an upper limit should be set on the value of the gifts.

In most cases, the gifts are local specialities. This can help local industries and help promote the local economies. But the way that the portal sites look like online shopping sites testifies to the heated competition among municipalities. Some municipalities offer locally produced personal computers, household appliances or precious metals, or merchandise and service coupons.

According to the Kyodo survey, the top 20 local governments in terms of the amount of donations collected took in more than 25 percent of the nationwide total. This points to the likelihood that many people make donations for the purpose of getting popular specialties, which deviates from the program’s intended purpose of supporting financially strapped rural municipalities so that they can better serve their local residents. Cases have also been reported in which donors are making money by turning around and selling the gifts.

For donors, the programs can be characterized as a device to pay ¥2,000 and get a gift worth a lot more than ¥2,000 — or as a tax-saving tool that will be more advantageous as one gets richer. The cost of procuring and shipping the gifts eats into the financial resources of local governments that they could otherwise use to finance their policies and services. As a result, the nationwide total of funds they can use for their specific policy measures is not increasing much.

A fundamental problem is that the program distorts the principle that residents pay taxes to local governments that provide administrative services to them. A drastic review of the hometown donation system will be inevitable, but given its many problems, a logical conclusion should be to abolish the scheme. To financially support prefectures and municipalities in dire conditions, the national government should come up with a better solution.