The President’s consultative Committee (Con-com) reviewing the 1987 Constitution estimates that each of the 18 federated regions will have P60 billion to P65 billion in financial resources when the country shifts to a federal system under the draft of the proposed new constitution.

The Con-com is proposing to retain the existing 17 regions but with the addition of Negros Island Region as a federated region.

Con-com Spokesman Conrado I. Generoso told the BusinessMirror that this amount is the “money that will be directly in the hands and under the control of the government of the federated regions.”

Using 2017 data, the initial estimate of P60 billion  to P65 billion  was computed based on the proposed provision that every federated region will have a 50-percent share in the four biggest revenue sources of the national government—income, excise and value-added taxes, and customs duties and tariffs—while the remaining 50 percent of these revenues will be the share of the federal government.

Also included in the computation of the amount were proceeds from certain taxes and fees, the collection of which will be transferred to each regional government. These are donor’s tax, estate tax, documentary stamp tax, land transportation franchise fees, vehicle registration, driver’s license fees and others to give them a steady stream of revenues.

At present, these taxes and fees are collected by different agencies of the national government.

“Federalism is about distributing the powers of the government. In this case, the power of taxation, which under a unitary system is a monopoly of the central government,” Generoso said. “Giving the regions the power to collect taxes is a means to empower them and their local government unit components economically.”

Prior to the proposal, income taxes, excise taxes and value-added taxes were already listed among the national internal revenue taxes from which 40 percent of the internal revenue allotment (IRA) of the local government units are sourced.

Now, however, Con-com is eyeing to have regional governments also have a share in the customs duties and tariffs. At present, these are not included in the revenues from which the IRA is computed.

Under the Local Government Code (LGC), the IRA share of local government units is 40 percent of national internal revenue taxes collected in the third fiscal year preceding the current fiscal year. The remaining 60 percent goes to the national government.

These national internal revenue taxes that were sources for the IRA include income tax, estate and donor’s tax, value-added tax, other percentage taxes, excise tax, documentary stamp taxes and such other taxes that may be imposed and collected by the Bureau of Internal Revenue. The tariff and customs duties, which are collected by the Bureau of Customs, are not included in the national internal revenue taxes, which are the basis for computing the IRA of local
government units.

Equalization fund

Generoso also clarified that the amount of P60 billion to P65 billion does not include yet the equalization fund, which is meant to be distributed to those regions who might need financial assistance.

According to the Con-com proposal, the equalization fund will amount to 3 percent of the annual general appropriations of the federal government.

“After distributing the 50-percent share of the top 4 revenue sources of the government and after giving to the federated regions the power to collect certain national taxes, there will still be gaps in financing in the regions. Meaning, there will be regions that will have higher revenues, higher income than other regions,” he said in a mix of English and Filipino. “To fill in the gap, the difference of regions that are more economically developed versus regions that are less economically developed, the funding will come from the equalization fund.”

He also pointed out that the higher the economic activity in a federated region, the higher the taxes and fees they can collect.

“That is the challenge [for every federated region]: to improve your economy, promote your economy, build up your economy,” he said.

Generoso pointed out that the committee needed to be careful with their design of taxes to be collected because they considered the need for a strong federal government.

“The taxation power will be shared, meaning, the bulk of the taxes, the bulk of the taxation powers will still be exercised by the federal government, but there will be taxes that will be collected by the regional government,” he said. The taxation power given to the regional government is important so that they can determine their economic policy or program within their regions, he added.

“If you have revenue sources, you can use [them] not only for social programs and projects but for infrastructure to support your economic programs for certain economic activities that will promote business etc.,” he said. “You have to give them that so that they will not be dependent on the dole-out or what will be given to them by the federal government.” Under the Con-com’s design, a regional government will be distinct from the provincial governments.

A Regional Legislative Assembly is constituted by one set of representatives elected per province and highly urbanized or independent chartered city while an equal set of representatives shall be elected region-wide by proportional
party representation.

They then elect a regional governor and regional deputy governor, who will preside over the Regional Legislative Assembly.

Asked if the regional government will have the power to impose higher taxes than other regions, he said it is unlikely that such will happen, as the existing rates are still set under the National Internal Revenue Code (NIRC).

He added that regions will have to craft their economic and investment programs and they will have to be competitive to generate investments in their regions.

“Also, under the constitution, taxation should be uniform, equitable and progressive so the legislative assembly cannot impose unreasonable taxes, otherwise their tax law can be stricken down by the Federal Constitutional Court for being unconstitutional,” he said.

“Even Congress cannot enact laws that will violate the principle of progressive, equitable and uniform taxation.”

Generoso also said that, once the proposed Constitution becomes effective, there will still be a need to amend existing laws, such as the NIRC and the LGC.

Business group’s worry

In a joint position paper on federalism on June 21, the country’s main business groups expressed concern over the regions’ added responsibility of tax collection and that some “states” will perform poorly, which may affect delivery of infrastructure and other services. It also cautioned against the planned equalization fund and argued that only a handful of regions will have the capacity to independently maintain strong production and trade that will support their population.

The position paper was signed by the Financial Executives Institute of the Philippines, Makati Business Club, Management Association of the Philippines and the Philippine Chamber of Commerce and Industry. The Semiconductor and Electronics Industries of the Philippines Foundation Inc. and Cebu Business Club were also signatories.

The Con-com is already 100-percent done with its proposed constitution and is on track to submitting its draft to the President on July 9 after the Committee has subjected the draft to final review.  Its final en banc session is scheduled on July 3, andCon-com members are expected to vote on the adoption of the entire draft federal constitution.