The government raised local income tax rates Friday in exchange for national income tax cuts introduced in January as part of tax reforms aimed at shifting revenue sources from the state to municipalities.
The Ministry of Internal Affairs and Communications, which is in charge of local-level taxes, said Friday's hike will not affect annual household tax burdens very much because it is offset by the national income tax cuts. But most taxpayers will pay more as a temporary local income tax cut introduced in 1999 and scaled down last year will be completely abolished in June.
Analysts say the higher tax burden could discourage consumer spending — a key engine for economic growth.
Under the latest reform, the local income tax rate was unified to 10 percent. Previously, there were three different rates, starting at 5 percent, depending on annual income.
The government had introduced tax breaks in 1999 to spur the sluggish economy, featuring a 20 percent cut in national income tax payments — to a maximum 250,000 yen — and a 15 percent reduction in local income taxes — to a maximum 40,000 yen.
In January 2006, the size of the national income tax cut was halved to 10 percent, while last June, the size of the local income tax cut was also halved, to 7.5 percent.