YOKOHAMA — After Tokyo Gov. Shintaro Ishihara announced his controversial plan to impose a local tax on the city’s banks earlier this year, other local governments have been searching for new revenue sources to replenish coffers drained by recession.
The trend has been welcomed as promoting the devolution of power, as central government subsidies generally represent large portions of local budgets. (The Tokyo Metropolitan Government receives no such subsidies).
However, local elected leaders face an age-old political problem: how to generate badly needed revenue without angering constituents. Ishihara tackled this by targeting an institution perceived to be able to afford it. Other governments are turning to a variation on sin taxes.
In late May, for example, the Yokohama Municipal Government in Kanagawa Prefecture unveiled a new municipal tax plan targeting gambling and sex-related establishments in the city.
“Most local governments are in dire financial straits as welfare expenditures have increased while revenues have decreased,” Mayor Hidenobu Takahide explained in a recent interview. “To narrow the gap, we need to increase revenues while restructuring the organization of City Hall.”
Such initiatives, however, have alarmed observers who perceive a sentiment of “Let’s tax the villains — they deserve it.”
City officials said they could not offer much comment as the details had yet to be worked out, noting that Takahide briefed them on the plan on the very day of the announcement to the media.
The statement issued by the city government spelled out two targets of taxation: hitherto tax-exempt public corporations reportedly making big gains, such as the Japan Racing Association, and cash-cow pachinko parlors, massage parlors and other adult-entertainment businesses.
In Yokohama, there are about 260 pachinko parlors, 640 mah-jongg salons and 280 sex-related establishments, including sex-toy shops and love hotels, according to Kanagawa Prefectural Police.
The JRA has a betting station in Naka Ward but no race track in the city. According to JRA officials, the betting station, one of 28 such facilities nationwide, sold tickets worth 136.3 billion yen in 1999.
Although the city denies it is targeting these businesses for moral reasons, their tainted public images make them fair game for taxation in many people’s minds.
Ishihara took aim at a different but also publicly unpopular establishment by taxing commercial banks. He also drew fierce criticism from the viewpoint of fairness.
One such critic was the author of the Yokohama tax himself, Takahide. “Revenue as well as expenditure should be fairly distributed. We should not levy a tax simply because it is possible,” he chastised Ishihara in his recently published book.
While officials of the JRA said they could not comment on the new plan because they don’t yet know its details, they did not hide their bewilderment.
According to the JRA, which is under the strict supervision of the Ministry of Agriculture, Forestry and Fisheries, the law mandates that 75 percent of revenue be allocated to refunding winning tickets and 10 percent to the national coffer.
The remaining 15 percent goes to the association’s budget for management, and any surplus is funneled to the central government.
Moreover, the officials said that the JRA earmarked 8.5 billion yen for a peripheral environment-maintenance budget for municipalities hosting its facilities and paid about 113 million yen to the city of Yokohama for that purpose last year.
“From where will they take money?” one official asked.
However, the city reasons that even tax-exempt public corporations should shoulder the cost of the city’s public services according to their means.
Takahide denied there was any political consideration behind taxing gambling and sex industries, saying they happened to be those making large profits and taxing them is therefore not unfair. Fairness does not necessarily require even distribution, he argued, citing the progressive income tax.
Despite the mayor’s claims that the plan is not based on moral grounds, other city officials explained that the taxation plan is also aimed at curbing the activities of gambling and sex businesses.
Shin Saito, a professor of economics at Osaka University, said the local taxation movement has been accelerated by a law promoting decentralization that took effect in April, which considerably lowered the hurdle for levying new local taxes.
Until then, new local taxes required the permission of the home affairs minister, but under the new law, local governments are required only to consult the ministry prior to initiating such taxes.
While Saito endorses the efforts of local governments to find new revenue sources as a sign of greater local autonomy, he is concerned that some governments may be inclined to go too far. “It is not that they have a 100 percent free hand on tax policies,” he said.
For example, when there is a corporate tax cut by the central government, a local tax on businesses will negate it, Saito said.
Also, from the viewpoint of fairness, he warns against targeting particular industries. “Why only the sex industry?” he asked. “Can they explain that to everyone’s satisfaction?”
He argued that in order to achieve fair taxation, local governments, residents and corporations must all “share the pain.”
“In Yokohama’s case, City Hall should restructure its organization,” Saito said. “Instead, it imposes more tax on businesses while reducing the burden on residents. It is a political performance with a view to re-election.”
Takahide said the city government is doing its share of restructuring efforts by downsizing personnel and cutting the budget. However, the effectiveness of cutting 15 jobs from a city workforce of 30,000, as scheduled for fiscal 2000, is not readily apparent.
Saito said he feared that other local governments are likely to follow suit in ganging up on easy targets and suggested that sidestepping pain-sharing is a slippery slope.
JRA officials were similarly concerned. “We are not just talking about Yokohama. We believe if the city can tax us, why not other municipalities?”