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Under legislation dating from 1954, the government’s revenues from “road-related taxes” have been exclusively earmarked for road improvement. These revenues have been a “sanctuary” of sorts for politicians representing the interests of industries engaged in road construction. Last year, then Prime Minister Junichiro Koizumi attempted to change the scheme to allow these tax revenues to be used for general purposes and to reduce government bond issuance.

Last week, a deal was reached on this change between Prime Minister Shinzo Abe’s administration and the ruling Liberal Democratic Party and Komeito, and subsequently won Cabinet approval. At a first glance, it appears to be a step toward realizing the original goal. But a close look tells a different story.

Under the deal, related laws will be revised in the 2008 Diet session to change the current scheme. But not all the tax revenues in question will be lumped together with general-account revenues. Only a portion of the tax revenues that exceeds spending for road construction will be used for general purposes, and a middle-range road construction plan will be worked out within 2007 to construct or improve “truly needed roads.”

Road-related national taxes raise 3.5 trillion yen annually and more than 80 percent of the money comes from the gasoline tax.

The deal should be regarded as a politically motivated agreement designed to attract votes in an Upper House election scheduled for July 2007. One problem with the deal is that a transparent mechanism is not provided for making rational decisions on road construction and improvement. Some communities need improvement of roads closely related to residents’ daily lives. But politicians and bureaucrats may still choose to construct costly and unnecessary highways and expressways, thus wasting money.

Local economies’ heavy reliance on road construction should be reduced. Transferring more road-related tax revenues to local governments should also be considered so they can improve “truly needed” roads under the scrutiny of local residents.

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