Ch. 26 - Intergovernmental Fiscal Relations

• Federalism 


  Division of power/responsibilities between the national government and state/local governments
• Fiscal federalism: division of economic responsibilities
• 1991 Local Government Code

  Philippine's decentralization
• Supervision means overseeing or the power or authority of an officer to see that subordinate officers perform their duties.
• Control is the power of an officer to alter or nullify what a subordinate has done in the performance of his duties.
• Main goals of devolution:

  • Bring development to the countryside
  • Abolish the system of patronage between the national and local governments
  • Create independence of local governments from national leadership
  • Allow local governments to develop at their own pace, with their own resources at their own discretion
• Extent of Decentralization

  • Health and social services
  • Agricultural support services
  • Education
  • Construction and maintenance of infrastructure (local purposes)
  • Forestry (projects/ laws)
  • Environmental management system
  • pollution control law
  • Protection/conservation of the environment
  • Small-scale mining law (under supervision of the national government)
• Fiscal Decentralization

  • Broadens taxing powers of local governments
  • Power to negotiate and secure grants or donations from foreign and local assistance agencies
  • Ability to borrow/loan
  • Specific share from national wealth exploited in their areas [60:40 sharing between national and local governments – Province (20%) – Municipality (45%) – Barangay (35%)]
  • Internal Revenue Allotment/National Tax Allotment (automatically released blocked grant)
• Formula for determining division of resources among provinces

  Population (50%)

  Land Area (25%)

  Equal sharing (25%)
• Responsibilities For a Barangay:

  • Agricultural support services
  • Health and social welfare service
  • Services and facilities related to general hygiene and sanitation, beautification, and solid waste collection
  • Maintenance of katarungang pambarangay
  • Maintenance of barangay roads and bridges and water supply systems
  • Infrastructure facilities such as multi-purpose hall, multi-purpose pavement, plaza, sports center, and other similar facilities
  • Information and reading center
  • Satellite or public market, where viable
• Responsibilities For a Municipality:

  • Municipal buildings, cultural centers, public parks including freedom parks, playgrounds, and other sports facilities and equipment, and other similar facilities;
  • Infrastructure facilities intended primarily to service the needs of the residents of the municipality
  • Public markets, slaughterhouses and other municipal enterprises
  • Public cemetery
  • Tourism facilities
  • Sites for police and fire stations and substations and municipal jail;
• Responsibilities For a Province:

  • Agricultural extension and on-site research services and facilities
  • Industrial research and development services
  • enforcement of forestry laws limited to community-based forestry projects, pollution control law, smallscale mining law, and other laws on the protection of the environment; and mini-hydroelectric projects for local purposes
  • health services which include hospitals and other tertiary health services
  • Social welfare services
• Responsibilities For a Province:

  • Provincial buildings, provincial jails, freedom parks and other public assembly areas, and similar facilities
  • Infrastructure facilities intended to service the needs of the residents of the province
  • Programs and projects for low-cost housing and other mass dwellings
  • Investment support services, including access to credit financing
  • Upgrading and modernization of tax information and collection services
  • Inter-municipal telecommunications services
  • Tourism development and promotion programs;
• Responsibilities For a Municipality:

  • Extension and on-site research services and facilities related to agriculture and fishery activities
  • implementation of community-based forestry projects
  • health services
  • Social welfare services
  • Information services which include investments and job placement information systems, tax and marketing information systems, and maintenance of a public library
  • Solid waste disposal system or environmental management system
• For a City:

  All the services and facilities of the municipality and province, and in addition thereto, the following:

  • Adequate communication and transportation facilities;
  • Support for education, police and fire services and facilities;
• Principles of Fiscal Federalism

  • National public goods vs. Local public goods
  • International public goods (Global environment, international security, knowledge, international economic stability)
  • Tiebout hypothesis - why decentralize (Market failure, Competition, Tax competition/race to the bottom, Redistribution)
• block grants in the Philippines- intended to provide LGU basic funding they need to finance devolved functions


  Internal Revenue Allotment/National Tax Allotment
• Non-matching categorical grant (mostly competitive grants)


  People survival fund (to improve resilience of communities from climate change)
• Conditional/matching grants - to focus on development of particular social service(both national and local spends)


  Conditional Matching Grant to Provinces (CMGP) for Road Repair, Rehabilitation, and Improvement (formerly KALSADA)
• Problems with the IRA formula (60:40 division)

  Vertical imbalance

  • Unfunded mandates (contributions for the health insurance premiums of indigent residents and population management)
  • functions were transferred to LGUs without any corresponding devolution of personnel and facilities from the central government. E.g. public works, environment and natural resource management
• Problems with the IRA formula (60:40 division)


  1. Vertical imbalance
  2. Horizontal imbalance
  3. Disincentive effect of IRA
  4. Predictability and timeliness in the release of the IRA
• Problems with the IRA formula (60:40 division)



  Horizontal imbalance

  • problem in the resource allocation between subnational levels
  • net resource transfer for cities is consistently larger than those for provinces and municipalities (because less cities than municipalities)
• Problems with the IRA formula (60:40 division)



  Disincentive effect of IRA

  • LGUs which received higher IRA (whether in absolute terms or relative to their expenditure responsibilities) tended to be lax in their tax effort
• Problems with the IRA formula (60:40 division)




  Predictability and timeliness in the release of the IRA

  • IRA not automatically released
• Other arguments for local provision

  • Active citizenry (since LGU closer to citizenry)
  • Efficiency (based on assumption that people are mobile and will create competition)
  • Principal agent concerns (local politics)
• Local fiscal powers

  power to create its own sources of revenues and to levy taxes, fees, and charges
• Fundamental Principles according to the LGC

  Taxation shall be uniform in each local government unit.
• Fundamental Principles according to the LGC

  Taxes, fees, charges and other impositions shall be equitable and based as far as practicable on the taxpayer's ability to pay, be levied and collected only for public purposes, not be unjust, excessive, oppressive, or confiscatory, not be contrary to law, public policy, national economic policy, or in restraint of trade.
• Fundamental Principles according to the LGC

  The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person.
• Fundamental Principles according to the LGC

  Revenue generated through the implementation of the tax, fee, charge, or other imposition will exclusively benefit and be under control of the LGU that imposed the tax, with exceptions explicitly specified in the Code.
• Fundamental Principles according to the LGC

  Each local government unit shall, as far as practicable, evolve a progressive system of taxation.
• Common Revenue Raising Powers

  Service fees and charges

  Public utility charges
• Incidence of Subnational taxes and expenditures

  • Incidence of taxes and benefits of local taxes (Immobile factors)
  • Capitalization hypothesis (Ultimate beneficiaries are landowners)