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Taxation under the draft ConCom Constitution

Taxation under the draft ConCom Constitution

By Benjamin R. Punongbayan

I WAS very surprised about the final output of the Consultative Committee to Review the 1987 Constitution. The resulting proposed constitution is not federalism at all!

I would describe the resulting document as providing a bit more decentralization and a slightly increased internal revenue allocation (IRA). I equate federalism to a government structure with a high level of local autonomy. The draft constitution does not have it.

The central government retains much of the government powers: taxation; national economic planning; police; elections; science and technology; civil, property, and commercial laws; prosecution of graft and corruption; and even basic education. The significant additional powers given to the regions (the term “state” was avoided) are infrastructure development; economic zones; and land use and housing within the region. The list of regional powers does not even include health care and the responsibility for the region’s environment and natural resources. I assume these were reserved for the central government.

The key element in region (state) autonomy under true federalism is the power to levy taxes — the direct collection of taxes to create the dynamism within the region to propel its economic growth. This principle and intent has been much expressed earlier by federalism proponents. There were then repeated statements that the regions (states) will directly collect much of the taxes and give a share of the total region tax collections to the central government to cover its needs. Well, that did not happen.

In general, the various changes in the draft constitution could all be made under the present government structure without calling it federalism. I guess the proponents started with federalism and wanted to end with federalism even when the output is not federalism.

Insofar as taxation is concerned, nothing much has changed.

The imposition of existing national taxation in almost all of its entirety has not been brought down to the region level. The central government continues to impose the large lines of taxes, like income tax; value-added tax (quite likely, includes percentage tax); excise tax; and customs duties. Very little has been added to the sources of direct region taxation. Additional sources come from documentary stamp tax; amusements and gaming tax; vehicles tax; and a few more. These sources provide a small amount of taxes. Moreover, these additional local taxes favor the rich regions.

Double taxation is not allowed so that the regions cannot impose taxes similar to national taxes. For example, the regions cannot impose income tax or any form of sales tax.

The regions’ main source of revenue will continue to come from an allocation of total national tax collections. This allocation was increased from the present 40% IRA to 50%, which is not much. In anticipation that, the share of the poor regions will not be enough for their needs, an equalization fund of 3% of total national tax collections is to be established. But this is quite small as I will show later.

To show a picture of these tax sharing and allocations, I made some calculations using the actual national tax collections in 2017. The Bureau of Internal Revenue collected P1,744 billion; Customs P457 billion; or a rounded off total of P2,200 billion. From this total, let us deduct the 3% equalization fund and the 5% annual Block Grant to Bangsamoro that is provided in the legislation currently being worked out in Congress, leaving 92% of which half goes to the 17 regions, excluding Bangsamoro.

That one half of 92% is equivalent to P1,012 billion to be divided among 17 regions. The current division formula for IRA is a weighted system based on population, geographical area, and a portion divided equally. The resulting allocation among the regions will, therefore, show a wide range. But let’s look at the average. On average, each of the 17 regions gets P60 billion and Bangsamoro, P110 billion. (The calculation of the Bangsamoro share has been simplified, but the result will not differ much from a long calculation.) Clearly, the share of each of the 17 regions is rather small, particularly for poor regions that tend to have a smaller population and smaller geographical area.

In essence, the regions are being given a straitjacket. A region cannot increase its sources of direct region taxation; it will mainly depend on its share of the national tax collections. It is not difficult to see that a region’s economic growth will depend almost entirely on the growth of the entire economy. Its relative position among the other regions will remain practically the same, or may even worsen in the case of poor regions, because the rich regions have a better economic engine.

In comparison, under the current government structure, the national government has the flexibility to help the poor regions much more (if it wants to) by providing additional financial resources to them, because it does not have the constraints now imposed in the draft constitution.

Under the draft constitution, the tax revenue pie has been put in a rigid grid. Tweaking the grid to favor one or two regions, especially if done repeatedly, will certainly trigger protests from other regions. It should be noted that there are only three rich regions in the country and, therefore, 15 regions would want to have a share of the equalization fund, which is equivalent to only P66 billion based on the 2017 national tax collections. (Surprisingly, this small fund will be administered by a commission composing of 15 top officers of the Republic!) That amount is equivalent, on the average, to only P4.4 billion for each of the 15 regions.

Clearly, the earlier intent of making the regions dynamic to pursue higher economic growth on its own cannot be realized. A region is constrained by its inability to raise incremental money through additional sources of direct taxation. It can only roll in the same tempo, or even slower, as the entire national economy rolls.

Looking at it in another way, the increase in the spending money of the regions is practically only 10% of the total national tax collections. We are making huge changes in the government structure, not to mention the additional cost that those changes entail, just to take care of that small increase. It does not make sense.

The weakness of the draft document is that there is too much focus and emphasis on form and pontification, but it is short of substance, except on two commendable areas: restraining political dynasties and introducing political party proportional representation in the House of Representatives and regional assemblies. But even in these two areas, the document came up short. The framers pulled their punches. I believe that, if one needs to inflict pain to achieve an elusive objective, he has to do it deep and hard, but once only. Otherwise, he may not be able to do it again.

Is the new better than the old? I don’t think so. It is a case of trying to make something better, but actually making it worse. There is another worry, which is not directly related to the main point of this commentary. There is a perception that local government executives see the present IRA as a doleout and, therefore, tend not to take good care of it, because the accountability for its use is not clear: To the national government? To the entire Filipino people? To the citizens of the local jurisdiction? That tax share has now been increased, although modestly.

The specter of Imperial Manila, now Imperial Davao, remains lurking.


Benjamin R. Punongbayan is the founder of Punongbayan & Araullo, one of the Philippines’ leading auditing firms.


As Published by BusinessWorld dated 18 July 2018