The furusato nōzei (hometown tax donation) system introduced in 2008 is a program that allows taxpayers to make donations to municipalities of their choice and get much of the amount deducted from their income and residential taxes. It was intended as a step to alleviate the gap in tax revenue between big cities and rural areas as the population flight from the latter to Tokyo continues unabated. And the amount of the donation surged in particular after the administration of Prime Minister Shinzo Abe, as part of its regional revitalization initiatives, doubled the upper limit on the tax-deductable donations (which varies according to the donor’s income and other conditions). The annual amount of donations made to municipalities across the country reached ¥365.3 billion in fiscal 2017 — 45 times larger than in its initial year.

What has also boosted the amount of the donations are the “gifts” returned to the donors by the municipalities that received the donations — over which there was no regulation in the program. While the name of the program may suggest that people would donate to the local governments of their hometowns, donors can choose any municipality they like to make the donations. In recent years competition has intensified among municipalities to offer extravagant gifts to attract donations, and the donations have tended to concentrate on the municipalities that offer expensive gifts, ranging from brand-name beef and seafood to bottles of imported wine, electronics products and coupons for a resort hotel in Hawaii.

In its attempt to rein in the overheated competition to attract donations with luxury gifts, the government has repeatedly urged municipalities to refrain from offering expensive gifts priced at more than 30 percent of the donations made or providing gifts other than their local products and specialities. But such calls have gone unheeded by some of the municipalities, which continued to overshoot the government-set guideline on the gifts, leaving the municipalities that follow the guidelines at a disadvantage.

Finally, Internal Affairs and Communications Minister Seiko Noda said last week that the government would legislate steps to overhaul the system — the gifts that the municipalities can offer would be limited to local products valued at no more than 30 percent of the amount of donations, and municipalities that violate the rule would be excluded from the program and the donations made to those municipalities would no longer be tax deductible. That such a step has to be taken indicates that the program has deviated from its originally intended purpose. The donations made under the program represent a loss of tax revenue in the municipalities where the donors live, and the money is donated to the recipient municipalities to cover their public expenses. The program must be overhauled so that it can serve its proper purpose.

Even as the amount of donations under the program surged, the total expenses incurred by the municipalities to procure and send the gifts to the donors, plus other related costs, came to as much as 55 percent of the amount donated in fiscal 2017. In other words, the net amount that the municipalities could use was less than half the donations. It is undeniable that the donations increased as the donors were attracted by the gifts being offered. But it should be scrutinized whether it is appropriate to solicit donations by giving gifts in return.

According to an internal affairs ministry survey, about 14 percent of the nation’s 1,788 municipalities, or 246, provided gifts to donors whose value exceeded 30 percent of the donations made. About 190 municipalities were found to be offering gifts other than their local products, including brand beef or imported wine.

The city of Izumisano, Osaka Prefecture, collected the largest amount of donations — ¥13.5 billion — last year. It was offering brand-name fruit, seafood and beverages made in other prefectures, as well as points that could be used to fly on low-cost carriers, as gifts in return for donations. Municipalities that followed the government guideline on the price and origin of the gifts saw their donations decline, while those that continued to offer expensive gifts were high on the list of municipalities that received more donations. Such an unfair competition will not contribute to making the program sustainable.

The program was reportedly used by people to make donations to municipalities that were hit hard by a recent spate of major disasters that struck the nation, including the torrential rains in western Japan in July and the earthquake that struck Hokkaido this month. The system should be promoted as a mechanism to enable people to support the municipalities that they really want to help.

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