The deadlocked tax reform debate took a small step forward Friday, when Finance Minister Masajuro Shiokawa stated that he is ready to relinquish some national income tax revenue to give local governments room to raise residence taxes.

Shiokawa indicated he may be prepared to give local governments greater budget-control powers and slim down the size of the national budget, in line with requests made by Prime Minister Junichiro Koizumi last year.

The transfer of tax-raising powers to prefectural governments is one of the so-called Trinity Reform package, which also involves reducing the central government’s subsidies for local governments and reviewing of the system under which tax grants are allocated to local governments.

But the package, advocated by Koizumi, has met strong opposition from ministries eager to retain their influence on local administration.

For example, the Public Management, Home Affairs, Posts and Telecommunications Ministry wants to prioritize the transfer of tax-raising powers, but the Finance Ministry hopes to reduce tax grants and subsidies first to relieve the burden on debt-ridden national coffers.

Shiokawa’s remarks appear to constitute a Finance Ministry compromise aimed at resolving the deadlock.

“I think it is OK to cut back income tax. But instead, we have to discuss how that cut should be used as the local residents’ tax,” Shiokawa told a regularly scheduled news conference.

He added that local governments should also take over some tasks now carried out by the central government.

“The point is we should also shift some tasks (to local governments) to carry out administrative reform,” Shiokawa said.

He also voiced readiness to propose certain steps to shift ministerial power to local bodies if reform talks fail to result in a conclusion.

“But it is still not the right time (to announce the step),” he said.

The stalemate was underlined Friday by a report compiled by a government advisory panel, the Council for Decentralization Reform.

The report advocates reducing the central government’s control of local revenue and expenditure, as well as its subsidies to local bodies.

“The prime minister told us he appreciated that the council drew up a report on such a difficult issue,” said Taizo Nishimuro, who chairs both the council and electronics maker Toshiba Corp.

But the report to Koizumi did not gain the support of all council members and does not include specific measures to promote tax decentralization.

The report states that four out of 11 council members accused the report of placing too much pressure on local governments to cut spending.

Moreover, one member refused to sign off on the report.

Analysts have also warned that the tax reforms would not reduce the public’s overall tax burden in the long term.

Decentralization will eventually lead to hikes in other national taxes, with the country destined to fall short of social welfare costs as the population ages rapidly, according to Katsuhiro Hachiya, an economist at Japan Research Institute Ltd.

The country has suffered chronic budget deficits in recent years, forcing it to issue bonds every year to fill the tax revenue shortfall.

Bonds worth a record 36.45 trillion yen are planned for fiscal 2003.

Ministers will discuss tax decentralization during meetings next week.

The issue will then be taken up by the Council on Economic and Fiscal Policy, a key panel led by Koizumi.

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