On Sept. 11, then-Internal Affairs and Communications Minister Seiko Noda gave a news conference at which she stated the government’s intention to revise laws for local taxes.

The ministry, which regulates taxation at the prefectural and municipal levels, is trying to rein in the furusato nōzei (hometown tax donation) system, which it claims many local governments abuse. Launched in 2008, the system allows taxpayers to donate money to local governments in areas where they do not live and in turn receive residence tax (jūminzei) cuts as a result.

The ministry’s original intention was to help local governments strapped for money due to depopulation and other factors by appealing to city dwellers’ feelings for the places where they grew up, thus the “furusato” (hometown) appellation. The bulk of local tax payments are collected by populous cities and prefectures, like Tokyo, Osaka and Kanagawa, where many residents were born elsewhere.

However, over the years some local governments began offering gifts in return for donations, and the ministry believes this trend has gotten out of hand. The law does not prohibit gift-giving, but in principle items on offer should be produced in the area represented by the local government in question.

What’s happened is that more and more municipalities and prefectures are offering expensive gifts that have no relation to their local industry or agriculture. Moreover, competition among local governments for furusato nōzei donations has become so heated that dozens of websites have appeared to help consumers choose among gifts that are available. What started out as a means of correcting an imbalance in local tax revenues has ended up as a profitable trade in goods and services.

To curb this behavior, Noda proposed a revision to the law stipulating that gifts offered by local governments must be locally produced and that their monetary value be below 30 percent of the donation amount. At the time of the news conference, the ministry estimated that 13.8 percent of Japan’s 1,788 municipalities were offering gifts whose value exceeded 30 percent of donated amounts, with 9.7 percent saying they did not intend to change such a policy.

Noda’s objection to the extravagant gift-giving practice has to do with fairness: When local governments take improper advantage of the system, others suffer. Large cities are losing revenue, even as their populations increase. A July 27 article in the Nihon Keizai Shimbun reported that Tokyo will lose a total of ¥64.5 billion in fiscal 2018 to the furusato nōzei system.

Kanagawa Prefecture followed Tokyo in missed revenue at ¥25.7 billion. These losses are substantial, especially if you consider that Tokyo and Kanagawa are two places where public day care is in notoriously short supply.

In effect, the furusato nōzei system turns normal taxpayers into freeloaders. Resident taxes are collected to pay for local services, so when residents are given the option of diverting some of that money to localities where they don’t live, they are abandoning their civic responsibility, thus placing a greater burden on neighbors who do not donate to other governments.

In an article in the November issue of Sekai, former Internal Affairs and Communications Minister Yoshihiro Katayama thinks the ministry should shoulder the blame rather than opportunistic local governments. He points out that there is nothing in the current law that prohibits local governments from competing for donations. All it states is that anyone who donates more than ¥2,000 to a prefectural or municipal government — including the one they live in — can subtract the difference from their local tax payment the following year.

What Katayama objects to in the debate over the system is the focus on taxes rather than on donations. A taxpayer can only deduct a donation from their income if it is more than ¥2,000, and in order for a furusato nōzei donor to have the donation subtracted from their local tax, they have to report the donation on their national tax return, since local governments use the national tax return to determine local tax obligations.

By using a donation system, the ministry undermines the stated intention of the program, which is for people to funnel some of their tax money to their hometowns. Moreover, donors get an extra tax break on their national tax returns, because they need to claim the furusato nozei payment as a charitable donation. As Tokyo Shimbun pointed out in a recent editorial, the system is advantageous to wealthier people, who pay higher residence taxes. They can claim a large part of their residence tax payment — even if they live in Tokyo and designate Tokyo as the beneficiary — as a deductible donation. The rich treat furusato nōzei as a loophole to pay less taxes, thus placing an even greater tax burden on poorer people.

Katayama thinks the ministry needs to revamp the way the donations are administered in relation to the tax code. The 30 percent limit proposal, he says, is nothing more than a stopgap measure. If the ministry truly wants to be fair, it would have to ban gift offers outright.

That may be more difficult than it sounds. As already mentioned, a whole industry has materialized to take advantage of the system, and many local governments, according to an article in the Dec. 7 issue of the weekly magazine Friday, have become dependent on it, as if it were an addictive drug. Friday describes examples of some of the more outlandish gift offerings, including a white grand piano for a donation of more than ¥8 million, a full-sized replica of the armor of famed samurai Sanada Yukimura for a donation of ¥3.8 million and a “castle” custom built for a dog for a donation of ¥1.98 million. One municipality even said it would allow a donor of ¥1 million to occupy the seat of the mayor for a day.

Friday reports that nationwide in 2017 there were more than 500 donations of more than ¥1 million. An editor of one of the furusato nōzei gift portal websites admitted to the magazine that her business explains to consumers how to game the system and get the highest return for their donation. Potential donors plug their yearly salaries and various gifts on offer into the calculator software and then find the best deals for their particular tax brackets. Internet retailer Rakuten offers bonus points if you order furusato nōzei gifts through their website.

According to Friday, as more and more local governments offer elaborate gifts to attract donations, the government tries to crack down on the practice even further, thus spurring local governments to implement more desperate tactics as consumers rush to make donations by the end-of-year tax deadline. Some localities have even announced that in light of the ministry’s complaints about certain expensive gifts, they would soon suspend offering such gifts, thus sparking a last-minute rush for them.

The ministry has even resorted to publicly shaming municipalities that flout the government’s instructions, though it doesn’t seem to make a difference. At the top of their list was the city of Izumisano, Osaka Prefecture, which has in the past offered high-grade melons from Shizuoka Prefecture and expensive tuna straight from Tokyo’s now-defunct Tsukiji wholesale market — products that have nothing to do with Izumisano. The ministry especially wants to crack down on gifts of home electronics and retail vouchers, since, in many cases, recipients will sell them for cash. Furusato nōzei is a racket open to everyone.

Yen for Living covers issues related to making, spending and saving money in Japan.

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