• Compiled from Kyodo, staff reports

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The government on Wednesday settled an argument concerning reforms for central and local finances with a compromise plan empowering local authorities to levy taxes.

Local governments will now be allowed to collect in taxes the equivalent of 80 percent to 100 percent of the revenue they lose through cuts in central government subsidies.

Specifically, local authorities will collect taxes worth 100 percent of the reductions in subsidies that cover expenses for public services commissioned from the central government under certain conditions.

Such services include compulsory education, welfare services and firefighting.

But the taxing powers will be ceded from the central government only after a streamlining of expenses for the public services in question. That means the amount of taxes local authorities can collect will be below the cuts if the expenses are reduced due to the review.

The plan is a compromise aimed at breaking the deadlock between Finance Minister Masajuro Shiokawa, who wants to trim subsidies to local governments, and home affairs minister Toranosuke Katayama, who says subsidy cuts should be compensated fully by granting taxing powers.

For those subsidies that do not come under the category of nondiscretionary spending, local authorities will be permitted to collect taxes worth 80 percent of the reductions.

The plan says the subsidies, including those for public works, will be cut by around 4 trillion yen by fiscal 2006.

Prime Minister Junichiro Koizumi instructed the government’s key economic policy-setting panel, the Council on Economic and Fiscal Policy, to design the specifics of the plan.

The cuts in subsidies and transference of tax-collecting power are part of a three-part reform package also involving a review of tax-grant allocations to local governments.

The reform package aims to promote decentralization and repair the finances of the central and local governments at the same time.

The economic council is set to include the reforms in an economic blueprint for 2003, which is to be finalized Monday.

Japan has suffered chronic budget deficits in recent years, forcing it to issue bonds every year to fill tax revenue shortfalls. The issuance of bonds worth a record 36.45 trillion yen are planned for fiscal 2003.

Koizumi told reporters after the panel meeting that he “took a leap forward” in pushing the reform of all three items: cutting down on subsidies; cutting down on tax grants; and shifting the tax revenue sources to local governments.

“All of these are difficult to do, as interests clash among different ministries,” Koizumi said. “That’s why we do it all at once.”

On his decision to set a numerical target for transferring tax-collection power to local governments, Koizumi said he chose to emphasize boosting local autonomy. Whether or not to set a target was a sticking point until the last minute.

“Local governments should do what they can. I put more consideration on local governments,” Koizumi said in an apparent gesture to counter criticism that he often sides with the Finance Ministry, who wants to retain its tax-collecting powers.

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