Excessive Return Gifts, Tax Saving Purposes are Distorting the System

Editorial

15:38 JST, August 17, 2023

It is unseemly that local governments appear to be competing with each other for tax revenues through the furusato nozei donation system. It is necessary to review the system and return it to its original purpose: supporting hometowns and other areas to which people are closely connected.

In fiscal 2022, local governments across the country collected a total of ¥965.4 billion in donations through furusato nozei payments, almost double the amount in fiscal 2019. This may be partly due to increased demand from people staying home as a result of the coronavirus pandemic.

The furusato nozei system was launched in 2008 in an effort to correct the disparity in tax revenues between urban and rural municipalities.

When taxpayers donate to municipalities in which they do not reside, the amount of the donation minus ¥2,000 is deducted from their taxes, including the resident tax, up to a maximum of about 20% of the resident tax amount. The appeal of this system is that donors can receive high-value gifts in return. About 9 million people use the system annually.

For municipalities with a weak fiscal foundation, this system has the advantage of bringing in donations to solve issues such as childcare support, as well as promoting local industries through the procurement of return gifts.

However, with the expansion of its usage, distortions have appeared in the system.

In the past, some local governments offered gift certificates or coupons and other high-value items, causing the competition for return gifts to heat up. The central government later decided to limit the value of return items to no more than 30% of the donation amount and to require that they be locally produced goods.

But now there is a growing tendency for donations to be concentrated in municipalities with well-known specialties.

The municipality that collected the most donations through the system in fiscal 2022 was Miyakonojo, Miyazaki Prefecture, at ¥19.6 billion, whose appeals are meat and shochu liquor, followed by Monbetsu and Nemuro, both in Hokkaido, which is rich in seafood. The top five were the same as in the previous year.

This may be a sign that many people choose their return gifts as if they were shopping. It was meant to be a system based on taxpayers’ goodwill, but the focus of attention has turned solely to return gifts. This system cannot be said to be healthy.

Moreover, under the furusato nozei system, tax payments that would normally be collected by the municipalities in which taxpayers actually live disappear. For that reason, Tokyo’s 23 wards and other municipalities claim that this system results in a decline in administrative services.

To correct such a situation, it is possible to set a cap on the amount of furusato nozei payments for wealthy residents and change the tax payment system to one that requires them to pay taxes to the places where they live as well.

Deductions allowed for furusato nozei payments are limited to about 20% of the resident tax. One idea would be to lower the percentage and discourage tax-saving measures and shopping-style use of the system.

Municipalities that receive furusato nozei donations need to clarify the use and results of the donations, such as whether the funds are used to promote local communities. It is important to make efforts to stimulate local communities in a way that everyone can accept.

(From The Yomiuri Shimbun, Aug. 17, 2023)