URR-7708 NTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT URBAN PUBLIC FINANCES IN DEVEIDPING COUNTRIES A CASE STUDY OF METROPOLITAN MANILA Prepared by: April 1976 Roy W. Bahl (Consultant), Pamela Brigg, and Roger S. Smith (Consultant) Urban and Regional Economics Division Development Economics Department FIL1E COP f'Y s Foreword This is one of a series of case studies of the public finances of urban governments in less developed countries. These studies, designed to be as comparable as the local conditions and availability of information permit, are meant to provide a) an understanding of the operation of finance systems in cities of developing countries; b) a format for describing and analyzing these systems; c) a menu of major problems facing these governments; and d) a set of data which may be used to establish comparative norms against which aspects of performance or problem severity of urban governments gener- ally may be evaluated. It should be emphasized that, although each case study contains a section on conclusions and policy implications, the pri- mary goal is not to offer a program of detailed fiscal reform for indivi- dual cities. Rather, it is to provide the beginnings of an analytic and informational base which will permit such judgements to be made on a con- sistent basis and with increasing confidence over time. All but a very small portion of this work was carried out as a World Bank Research Project (670270) under the direction of Professor Roy Bahl, of the Metropolitan Studies Program, The Maxwell School, Syracuse University, and Mr. Johannes Linn, of the Urban and Regional Eonomics Division of the World Bank. The overall project includes case studies of ten cities, eight of which were conducted under Research Project 670270: Ahmedabad and Bombay, India; Cartagena and Bogota, Colombia; Jakarta, Indonesia; Kingston Jamaica; Seoul, Korea; and Turis, Tunisia. In addition, case studies on Lusaka, Zambia, and on Manila, the Philippines were prepared as separate, but related efforts. In the final phase of this research a set of papers will be prepared on major urban public finance issues, comParing practices and ex- periences in these ten case cities, as well as others for which comparable infor- mation exists. Foreword This is one of a series of case studies of the public finances of urban governments in less developed countries. These studies, designed to be as comparable as the local conditions and availability of information permit, are meant to provide a) an understanding of the operation of finance systems in cities of developing countries; b) a format for describing and analyzing these systems; c) a menu of major problems facing these governments; and d) a set of data which may be used to establish comparative norms against which aspects of performance or problem severity of urban governments gener- ally may be evaluated. It should be emphasized that, although each case study contains a section on conclusions and policy implications, the pri- mary goal is not to offer a program of detailed fiscal reform for indivi- dual cities. Rather, it is to provide the beginnings of an analytic and informational base which will permit such judgements to be made on a con- sistent basis and with increasing confidence over time. All but a very small portion of this work was carried out as a World Bank Research Project (670270) under the direction of Professor Roy Bahl' of the Metropolitan Studies Program, The Maxwell School, Syracuse University, and Mr. Johannes Linn, of the Urban and Regional hBonomics Division of the World Bank. The overall project includes case studies of ten cities, eight of which were conducted under Research Project 670270: Ahmedabad and Bombay, India; Cartagena and Bogota, Colombia; Jakarta, Indonesia; Kingston Jamaica; Seoul, Korea; and Tuis, Tunisia. In addition, case studies on Lusaka, Zambia, and on Manila, the Philippines were prepared as separate, but related efforts. In the final phase of this research a set of papers will be prepared on major urban public finance issues, comparing practices and ex- periences in these ten case cities, as well as others for which comparable infor- mation exists. - 11 - This case study of the Public Finances of Metropolitan Manila is an outgrowth of field work carried out in 1973 and 1974 by Professor Bah1 and Pamela Brigg. Douglas H. Keare Urban and Regional Sconomic s Division Development Economics Department - iii - Research Staff Roy Bahl and Johannes Linn have been responsible for the final editing of all papers issued under--or in association with--this project, ensuring accuracy and consistency, etc.; however, a large number of other persons have been involved in their production: Detailed Case Studies Principal Research Arising out of RP0270 Researcher (s) - Assistant (s) Ahmedabad Roy Bahl, Douglas Keare Michael Wasylenko, Tamar Katz Bombay Francine Bougeon-Maassen, Michael Wasylenko, Roy Bahl Tamar Katz, Carlos Noble, Mark Gellerson Bogota Johannes Linn, Roy Bahl Michael Wasylenko, Carlos Noble, Tran Than Dang Cartagena Johannes Linn, Roy Bahl Tran Than Dang, Carlos Noble Seoul Roy Bahl, Douglas Keare Hwang Myong Chan, Michael Wasylenko, Tamar Katz Jakarta Johannes Linn, Roger S. Smith, Hartojo Wignjowijoto, Roy Bahl Limited Case Studies Arising out of RP0270 Kingston Francine Bougeon-Maassen, Johannes Linn, Roy Bahl Tunis Remy Prud'homme Limited Case Studies of Other Origins Lusaka Robert Saunders Manila Roy Bahl, Pamela Brigg Roger S. Smith 1/ Roy Bahl, who is principal consultant on this project is the Director, Metro- politan Studies Program, The Maxwell School. Douglas Keare, Johannes Linn, and Pamela Brigg are World Bank staff members; as is Robert Saunders, though his input to this project occurred on a consultihg assignment. Remy Prud'homme, Francine Bougeon-Maassen, and Hartojo Wignjowijoto have served for more limited periods as consultants to the World Bank. V - iv.- Urban-Regional Economics Division Urban Public Finance Project Case Studies Paper No. Title Author 1 Urban Public Finances in Developing Countries: Roy Bahl A Case Study of Metropolitan Ahmedabad 2 Urban Public Finances in Developing Countries: Johannes Linn A Case Study of Metropolitan Cartagena 3 Urban Public Finances in Developing Countries: Roy Bahl and A Case Study of Metropolitan Seoul Michael Wasylenko 4 Urban Public Finances in Developing Countries: Remy Prud'homme A Case Study of Metropolitan Tunis 5 Urban Public Finances in Developing Countries: Roy Bah; and A Case Study of Metropolitan Manila Pamela Brigg and Roger S. Smith TABLE OF CONTENTS Page No. I. LOCAL GOVERNMENT STRUCTURE.....................I........... 1 II. INTERNAL GOVERNMENTAL ORGANIZATION........................... 4 Budget Structure and R 6 Budget Prepaoat. . . . . . . . 6 Budget Format.......................................... 8 III. EXPENDITURE RES ON IB LI Y. .. .. .. .. .. . ..*.. 10 IV. EXPENDITURE PATTERNS. .. . .... ........................... 14 V . REVENUE STRUCTURE.*... .................... . ..*. . . 18 Real Property Tax.............. .......... 20 Special Assessments...................................... 27 Other Local Taxes............................................ 28 Licenses ..... 28 Fees ... 29 User Charges and Commercial Reveue.......................... 29 Rents and Fines ............................................. 30 VI. REVENUE PATTERNS .... 30 Trends * .. ................................................. 30 Revenue From Own Sores....... 32 Property Taxation . . . . . . .. 32 Other Revenue From Own Sources ......................... 38 Problems and Issues .. . b1 Utilization of Tax Powers .. h2 Local Government Tax Reform . 7 Page No. VII. INTERGOVERNMENTAL FISCAL RATOS. ............. 50 Shared Taxes ............. ............................ 50 Grants-In-Aid .............................................. ** 6 Loans ........................................................ 58 VIII. METROPOLITAN FISCAL PROBLEMS AND METROPOLITAN GOVERNANCE...... 60 Recent Reforms .... .61 Impending Reforms ............................................ 63 Metropolitan Government .. . . ... Proposed Reforms ..... ..... Evaluationion. . . .......... 68 LIST OF FIGURES Page No. Figure 1: The Structure of Local Government in the Philippines, 1973 2 LIST OF TABLES Table 1: Metropolitan Manila: Cities, Municipalities and populations 3 Table 2: Budget Outline of Province or City 9 Table 3: Functional Responsibility Within the Metropolitan Manila Area 11-12 Table 4: General Fund Expenditures of Metropolitan Manila Local Governments: By Function 16 Table 5: Expenditure Patterns: City and Municipal Governments in Metropolitan Manila 17 Table 6: Authorized Property Tax Rates and Distribution of Property Tax Collections 22 Table 7: Assessment Ratios by Type of Property 23 Table 8: Revenue of Manila Metropolitan Area 31 Table 9: Revenue of MMA: Percent Average Annual Rate of Change 33 Table 10: Per Capita Property Tax Revenues in Selected Jurisdiction,1970 34 Table 11: Effective Real Property Tax Rate in Metropolitan Manila., 1972 35 Table 12: Assessment Level of Real Property in Metropolitan Manila, 1971 37 Table 13: Real Property Tax Collection for 1971 38 Table 14: Local Per Capita Revenues from Licenses and User Charges, 1970 39 Table 15: License Taxes on Various Establishments 40 Table 16: Comparative Fiscal Efforts of Selected Metropolitan Area Governments 43 Table 17: Per Capita Revenue from Own Sources, 1970 45 Table 18: National Government Income Tax Collections in Metropolitan Manila )j6 Table 19: Distribution of Internal Revenue Allotments, 1960 and 1970 51 Table 20: Comparative Projected Allotments of Cities and Municipalities in MMA for Fiscal Year 1974 (P-000's) 54-5- I. LOCAL GOVERNMENT STRUCTURE The Philippine national government exercises a large measure of control over all local political and administrative units in the country. Local govern- ments are creations of the national government and any restructuring must be under- taken by the national government. Enactment of such measures as a new local government code or any governing or financing authority that might be created for Metropolitan Manila must be direct actions of the national government. The system of local government in the Philippines consists of provinces, cities, municipalities, and barrios. Provinces are partitioned into municipalities, which in turn are subdivided into barrios. C;Lties do not form part of a province, but, like the provinces, they are directly linked, administratively, to the national government. Cities are further subdivided into districts or barrios (Figure 1); neither barrios nor districts have significant revenue authority or expenditure responsibility. Local govern- ment structure in the Metropolitan Manila Area (MMA) generally does not differ from that in other areas of the country. The MMA has presently a fragmented local government system which includes, in addition to five cities, 22 muni- cipalities which constitute parts of four different provinces-(seeTable 1); these cities and municipalities are in turn subdivided into districts and barrios. Cities are governed by their charters, while provinces and muni- cipalities are governed by the Provincial Code and the Municipal Code as amended by several acts and decrees: the Revised Administrative Code (1917), -2- Figure .1: THE STRUCTURE OF LOCAL GOVERVNT IN THE PHILLIPINES,1973 N ti on Province (68) Municipality (1,439) Chartered City (61) 1/ /1/ \ 21 Barrio Barrio District 1/ There are 33,832 barrios. 2/ Manila City is comprised of districts rather than barrios. Unlike the barrio, the district is purely an administrative unit with no government or budget. -3- TABLE #2: POPULATION OF MANILA MBEROPOLITAN AREA Censal Years 1948,1960 and 1970 Manila Metropolitan Area 1948 1960 1970 Manila Metropolitan Area........ 1,72,888 2,695,429 363,387 I- Manila and Suburbs.............. 1,366.845 2,107,079 3,168,105 1. Manila .....................* 983,906 lp1,38p611 1,330,788 2. Caloocan City.............. 58,208 145,523 274,,453 3. Makati, Rial.............. 41,335 114,540 264,918 4. Mandaluyong, Rial......... 26,309 71,619 14.9,407 5. Navotae, Rizal............. 28,889 49,262 83,245 6. Pasay City................. 88,728 132,673 206,283 7. Queson City 107,977 397,990 754.52 8. San Juan, Rizal 31,493 56,861 104,559 II - Additional Areas................ 3584033 8888330 1195282 9. Bacoor..................... 20,453 27,267 48,440 10. Bihan, Laguna.............. 20,794 33,309 58s290 1. Cainta, Rizal.............. 3,692 6,803 20,714 12. Cavite City................ 35,052 54,891 75,739 13. Kawit, Cavite............. 13,970 19,352 28,447 14. Las Pinas, Rizal........... 9,280 16,093 45,732 15. Malabon, Rizal............. 46,455 76,438 141,514 16. Marikina, Rizal........... 23,353 40,455 113,4oo 17. Meycauayan, Bulacan........ 21,695 32,234 50,977 18. Muntinglupa, Rizal......... 18,444 21,893 65,057 19. Noveleta, Cavite........*.. 5,003 7,029 10,560 20. Paranaque, Rizal........... 28,884 61,898 97,214 21. Pasig, Rizal............... 35,407 62,130 156,492 22. Pateros, Rizal............. 8,38 13,173 25,468 23. Rosario, Cavite ...........11,894 16,227 23,817 24. San Pedro, Laguna.......... 9,063 14,082 32,991 25. Tagig, Rizal.............. 15,340 21,856 553,27 26. Taytay, Rizal........... 14,144 21,747 &5,717 27. Valensuela, Bulacan........ 16,740 41,473 98,456 SOURCE: Bureau of Census and Statistics, Journal of Philippine Statistics 214, No. 3 (ThIrd Quarter, 1973) p. xviii. the Local Autonomy Act (1959), and the Decentralization Act (1967). These acts and decrees have increased the functions and powers, especially taxine powers, of the local government units, including cities. However, because of the highly centralized government structure, national officials, particularly the Pres- ident, exercise considerable power. Declaration of martial law in September 1972 has,of course,increased the power of the President.immensely./ The chartered city is administratively independent from the pro- wince in which it is located. The range of services provided by these char- tered cities depends on the level of city resources. Manila City and Quezon City are more autonomous than many because of their relatively high income. They can perform, and even expand, their services frequently without depending on national aid. In the recent past, cities, municipalities and municipal districts could be created only by Congress. The number of chartered cities expanded from 29 in 1956 to 61 in 197h. Cities have usually been created from municipalities which were relatively heavily populated and had high income levels, although there are no fixed standard for the granting of city charters. Makati, for instance, recently requested to become a city independent of Rizal Province, but was denied. The new Constitution (January 1973) states that only "highly urbanized" cities will be allowed to become independent of their provinces. The new local government code establishes detailed criteria for defining highly urbanized cities and for creatihg, abolishing, merging, or altering boundaries. II. INTERNAL GOVERNMENTAL ORGANIZATION Provincial governments are headed by governors, city and municipal governments by mayors, and barrios by barrio lieutenants. 'Each governor 1.! President Marcos has issued well over 400 decrees from September 1972 to early in 1974, several of which affect local government structure. The most important of these, particularly P.D.76, P.D.14 and P.D.231, are discussed below. is assisted by a vice-rovernor and the mayors each by a vice-mavor. The executive branch works with the legislative branch, i.e., the provincial board, the city council, the municipal council and the barrio council in the case of provinces, cities, municipalities and barrios, respectively. Under the new Constitution of January 1973, governors, city may6rs, and municipal mayors, as well as- vice-goveimors and vice-mayors, and members or provincial boards, the city councils and the municipal councils are elected every six years; it is unclear, however, when the next local elections will take place./ Provincial and city treasurers, engineers, health officers, and sup- erintendents of schools are appointed by the President of the Philippines, with the consent of the Commission on Appointments. These officials in turn appoint their counterparts at the municipal level. The local chief executive has no authority over these appointments.- The heads of the other departments, e.g., the assessor, and their subordinates are paid out of local funds and are appointed by the local chief executive.l/ It should be made clear that the office of the treasurer and the office of the assessor are separate. The primary responsibility for collecting taxes and other revenues imposed by ordinance rests with the provincial treasurer for municipalities and with the city treasurer for cities. Actual collection is done by the municipal and city treasurers, respectively. The assessment of real properti-s for tnxation pirposes is the responsibility of the provincial or city assessor. There are also regular elections for barrio council members. The member who receives the most votes becomes the barrio lieutenant. Of these offices, the barrio only has a treasurer who is appointed by the barrio lieutenant. There is, however, a detailed system of cost sharing between the national and provincial governments with respect to a number of appointed provincial posts. Budget Structure and Responsibility Budget Preparation The local treasurer prepares the estimates of revenues for the budget and is responsible for the collection of local taxes, licenses and fees. He submits his revenue estimates to the chief executive (Governor or Mayor) who in turn submits the proposed budget to the local legislative body for enactment. The mayor or governor has the power to veto the approved budget twice, and the city council or provincial board, in turn, can override the veto. If the differences cannot be resolved, the budget dispute is sent to the Presi- dent for resolution. This rarely happens. The Department of Finance reviews the city and provincial budgets within one hundred days after their approval, to verify their legality with respect to the following: 1) Budget appropriations must not exceed estimated tax receipts and/or income (estimated income includes intergovernmental assistance but does not include borrowing). 2) Statutory and/or current contractual obligations must be met. 3) No individual salary can exceed the maximum salary provided for by the salary laws and executive orders. Changes in the budget within a fiscal year can be made only through the adoption of supplemental budgets, even if such changes are mea-nt only to rearrange the budget allocations. There is no limit to the number of supple- mental budgets that can be adopted during a fiscal year. Quite apart from the preparation and approval process, local governments have various statutory and contractual obligations. Cities and provinces must contribute a certain percentage of their revenue from regular sources, depending on their class (which depends on their income level), to the National Health Fund for city and provincial hospitals. In turn, munici- palities must contribute to the provinces for hospitals. Also, in the case of the Special Education Fund, 40 percent of the funds collected for it in cities are transferred to the National Stabilization Fund, which is used solely for education. As for the Road and Bridge Fund, part of it is used as local counterpart funds in obtaining funds from the national Highway Special Fund. In terms of expenditure adjustments, maximum salary rates are fixed by law for provincial and city officials (R.A. 4477, 1965) and for municipal officials.- The Civil Service Law fixes maximum rates for provincial and city subordinates. R.A. h77 also limits the percent of revenues from regular sources that can be spent on wages and salaries as follows: 50 percent in first-class provinces and 55 percent in first-class cities up to 80 percent in seventh-class provinces and 85 percent in seventh-class cities. However, allowances can be issued to get around these limits. There is no limit to the number of positions that local goverrment legislative bodies can create. Minimum wage laws provide a standard, though not all local governments have implemented them. Minimum rates for police salaries were set in 1966 and recently amended. The minimum rate for police officers is now P200 per month. However, in Makati, the wealthiest municipality in the metropolitan area, police salaries are P700 per month. The provincial treasurer and the municipal treasurer review the budgets of the municipalities and barrios, respectively. The budget process of the barrio varies from that of the higher local governments. The barrio budget is prepared by the barrio treasurer (who is appointed by the barrio lieutenant) and approved by the barrio council. 1/ A draft revising the salary limits specified in R.A. 4477 is currently being prepared. 8- Budget Format The city, province and municipal budgets consist of three funds: General Fund, Special Education Fund, and Road and Bridge Fund. The local government budgets do not distinguish between capital and current expenditures, and their classification of expenditures is only quasi-functional (see Table 2). The present budget system discourages sound financial planning. The absence of a budget breakdown by capital and current accounts prevents investment planning, and lack of a meaningful and detailed classification of expenditures by function hinders planning for improvement of specific service levels. Moreover, the frequent preparation of supplemental budgets encourages piecemeal planning. The format of the present budget documentt is thus not amenable to effective fiscal planning. The new local government code will abolish the Road and Bridge Fund and create an Infrastructure Fund. -9- Table 2: BUDGET OUTLINE OF PROVINCE OR CITY General Pund FY I. TOTAL ESTIMATED INCOME .....o..... II. TOTAL EXPENDI7JES3................ A. TOTA NATIONAL ALIDTIMTS........ A. GENERAL ADMIISTRATIO1 ......... 1. Reg.Int.Rev.Alotment.......... 1. Office of the Governor/Mayor.. 2. Special Allotments............. a. Office of the Attorney..... 3. Excess Income Ta ............. 2. Office of the Board .......... 3. Office of the Auditor ........ B. EAL PRCPDERTY TAX ........ 1. Current Year.........o........ B. GOVERMENT FINANCE 2. Preceding Year ............... 1. Office of the Treasurer ...... 3. Previous Years 2. Office of the Assessor ..... h. Penalties ........... C. ADJUDICATION ............ C. MUNICIPAL LICENSE ............... 1. Office of the Fiscal 1. Current *................... 2. Office of the Clerk of Court.. 2. Penalties ............. 0..6... 3. Office of the ....... D. PUBLIC UTILITIES D. PROTECTIVE SERVICE ............. 1. Receipts ............. 1. Office of the Chief of Police. 2. Expenses ... ................... 2. Office of the Fire Dept ...... 3. Net Gain (Loss) ............... 3. Office of the Health Offer.... E. NATIONAL AIDS ................... E. SOCIAL IMPHUEMENT ............. 1. Maint. of Schools ............ F. ALL OTHMERS .................. 2. Maint. of Prisoners .......... 3. Mhint. of Parks & Monmts .... 4. Library, ...... F. ECONOMIC DEVEOPMENT 1. Office of Agric. ........... 2. Office of Livestock Inspe tr .. 3. Office of Engnr .............. It. Oper of ThlOph.. Wtwarkc, & (Wt r u l.U........ 5. Oper. of Mkts & Slghtrhse ... G. OPER. OF ECONOMIC ENTERPRISES .. H. INTERGOVERMENTAL AIDS ......... I. LOANS ADACES & TRS .... 1/ Fiscal year begins July 1. J. REAL PRPERTY .................. K. EQUIPMENT ...................... L. OTHERS .............o.......... - 10 - III, EXPENDITURE RESPONSIBILITY The distribution of final expenditure responsibility for public services delivered within the MMA is summarized in Table 3. In many cases, several levels of government are responsible for a specific function, e.g., the construction and maintenance of roads (five levels), high schools (five levels), health facilities (four levels), and planning (five levels). At present, the national government has the major responsibility for flood con- trol and drainage, road construction and maintenance, the port, air and rail transportation, housing, health, education, welfare, pollution control and planning. City or municipal governments have the predominant responsibility for refuse collection, traffic control, street lighting, fire protection, pol- ice, markets and cemeteries. Government corporations have major responsibility for water and sewerage (MWSS) and shared responsibility, with regulated pri- vate companies, for electricity (NPC) and telecommunications (GTS). The major regulated private companies sharing responsibility are MERALCO (electricity); PLDT, Republic and PTT (telecommunications); Manila Gas, and a number of comp- anies for bus and jeepney transportation. Attempts at metropolitan area coordination in the delivery of these services are already being made. A metropolitan police force, METROCOM, created to cover 17 local governments in the area, is presently financed from national government funds. Coordinating agencies have been established 1/ However, by 1975, the Deputy for Policy Phtters of Provincial Constabulary was to have consolidated the local police force in Metropolitan Manila as a step toward nationalization of the police force as provided in PD421. Table 3: FUNCTIONAL RESPONfSIBILITY WITHIN THE METROPOLITAN MANILL AREA (for various levels of governmåent and government and regulated corporations) P = Primary responsibility X - Secondary responsibility Munic t. Covernent RegulAted uctton Barrio Palty city Province Nation Corporation Industrie. Note Electricity :-ial Governments play a minor role in slum clearance. They are involved in the financing only if the slum clearance. * They are :ivol:e. :he financing only if the slum clearance project relates to City or Municipal land. 18/ In the ctse -f &nq Palay and Carmona, the infrastructure was constructed by the Army Corps of Engineers and the Department of Public Works, u-snr :.-a :-nArvision of the People's Homesite and Housing Corporation. The Presidential Assistant for Housing and Resettlement Agency p-:7iced 1.-portation for squatters to these areas. The Department of Social Welfare helped the squatters to adjust to their resettlenszt are In the future construction of dwelling units for government housing projects - resettlement and otherwise - will be by the NE:io.a 1:..ing Corporation. 19/ Municipal hospi:&i ire rare. Generally, the municipality contributes to and makes use of the Provincial hospital. 20/ Makati was gran:ec 3ermission to take over the financing and hiring for teachers in primary schools. , -13 - for fire control. A Metropolitan Mayors Coordinating Council (MMCC) was set up to coordinate the activities of local gove-nments in the MMA. So far, the MMCC has made an agreement to coordinate flood control,drainage and garbage control activities; however, their powers are merely coordinating ones, as the MMCC has neither budget nor strong implementation powers. Another attempt at providing for an areawide service district is the creation, by Presidential Decree No. 18, of the Metropolitan Manila Flood Control and Drainage Council, which is to formulate and implement a flood control and drainage program for the Metropolitan Manila Area. This council is headed by the Secretary of Piiblic Voiks and Conunications, and its membership consists primarily of the 14 members of the MMCC. The Bureau of Public Works (BPW) will be responsile for technically planning and implementing the program. A secial metroDolitan flood tax has been created, and is a PO.25 tax levied on all admissions tickets of movies houses in Greater Manila for a period of 15 years. If this tax does not yield sufficient revenue, an additional tax of 0.125 percent can be levied on real property for the flood control and draina&e pjeft. In addition, central government appropriations may be made. Also in the area of flood control, the Laguna de Bay Development Authority is responsible for the development of Lake Laguna de Bay, which in- cludes rlood control, drainage, water supply, pollution control, and recreation projects. Since the creation of the Flood Control Fund,it has turned over some of its original flood control and drainage responsibilities to the BPW, e.g., Mangahan Floodway and Paranaque Spillway. The Laguna de Bay Development Authority consists of representatives of two provinces: Laguna and Rizal. Each was initially supposed to contribute P300 million. Laguna, however, was able to contribute only P00 million. Clearly, its future projects will affect the MMA. From this summary outline of public service delivery responsibility in the MMA, two characteristics of Manila's public finances should be clear: first, the local government structure is badly fragmented and there are no incentives or pressures on local governments to coordinate service delivery; and sepond, the coordinating bodies which presently function, are in most cases little more than advisory bodies. IV EXPENDITURE PATTERNS The population of Metropolitan Manila grew by 62 percent from 1960 to 1970, while total per capita expenditures from the general funds of the cities and municipalities in Metropolitan Manila increased by 82 percent during this period, from P24.4 to P44.4 per capita. Since the consumer price index during this period increased from 79.4 to 133.4, or by 68 percent, there was very little real increase in per capita general fund expenditures.-/ More- over, household surveys of family income and expenditure for 1961 and 1971 suggest that real median family income in Manila and its suburbs actually declined 0.9 percent during this period. These results suggest that the level of general fund expenditurus as a percentage of income has probably risen only slightly during this period. I1 If the CPI (base 1965 = 100) is used to convert 1960 and 1970 general fund expenditures per capita to constant figures, the rate of increase in real terms from 1960 to 1970 is only 8 percent, or less than 0.8 percent per annum. As indicated in Table b the bulk of expenditures by local govern- ments in Metropolitan Manila is for economic development (public works, etc.) and protective and social improvement (police, fire, garbage collection, health and education). Expenditures increased most rapidly during 1960-1970 for general administration and protective and social improvement. Total general fund expenditures of municipalities increased much faster (21 percent per annum) than those of cities (9.6 percent per annum) in the metropolitan area during this period, though the total general fund expenditures of cities were still over three times those of the municipalities in the area in 1970. Part of the more rapid growth of these expenditures in municipalities than in cities during 1960-1970 was a result of more rapid population increases. Total city population in the YMA increased at an annual rate of 35percent over this period, as compared to 7.0 percent for total municipal population. Still, per capita local government expenditures increased at an average annual rate of 13 percent for municipalities, F6.9 per capita to P23.1 per capita during this period, as compared to 6 percent for cities, P34.7 per capita to P61.8 per capita. While the level of expenditures of municipal governments was "catching up" with that of the city governrments, there was also a change in the distribution of expenditures across functions. As may be seen from Table 5, there has been a significant increase over the past decade in the proportion of municipal expenditures devoted to education; and, in both municipalities and cities, there has been a significant increase in the proportion devoted to health and environmental hygiene-i, Salaries and allowances accounted for 71 percent of total general fund expenditures of cities and municipalities in 1970 and 68 percent in 1960. Table 4: GENERAL FUND EXPENDITURES OF METROPOLITAN MANILA LOCAL GOVERNMENTS: BY FUNCTION 1970 Annual Total Percent Percent Function (P 000,000's) Distribution Increase 1960-1970 General Administration 27.2 13 12.5 Government Finance 16.4 8 6.6 Protective and social 82.5 39 12.3 improvement Economic development 86.5 0 11.4 TOTAL 212.7 100 11.4 Source: Data supplied by-the Philippines Government officials. Table 5: EXPENDITURE FATTERNS: CITY AND MUNICIPAL GOVEPMENTS IN METROPOLITAN MANILA 1960 1970 Percent Distribution of Expenditures Education: City 25.8 26.X Municipal 28.1 31.5 Police: City 16.7 16.2 Municipal 16.3 15.9 Public Works: City 13.8 13.8 Municipal 13.4 10.3 Health and Environmental Hygiene: City 12.2 15.3 Municipal 12.1 16.4 Source: Data supplied by the Philippines Government officials. 1:8 - Repairs and maintenance accounted for 6 percent, supplies and materials 6 percent, and other current expenditures 7 percent of total general fund expenditures in 1970. A relatively insignificant item-expenditures on statutory obligations (3 percent of total) -- grew most rapidly during this period (18 percent per annum). Data on expenditures by the barrios in Metropolitan Manila are not available, though there is general agreement that such expenditures are negligible. Data on expenditures by the provinces in Metropolitan Manila are also unavailable; but in any event, these expenditures are minor compared to either those of the national government or those of city and municipal governments. Data. are not available which would indicate the level of national government expenditures in Metropolitan Manila. V. REVENUE STRUCTURE National tax laws grant cities, municipalities and barrios the authority to impose certain taxes, fees, license charges and user charges. Cities are granted additional taxing powers through their charters. Provinces have not enjoyed taxing powers in the past, only the right to share certain 1/ local and national taxes. The Local Autonomy Act (R.A.2264, as amended by R.A.h97 and R.A.5752) place restrictions on local taxing power by excluding from local authority the right to levy certain taxes. The new Local Tax Code, P.D.231, extends many of these restrictions. P.D.231 explicitly precludes local governments from using the following: (1) documentary stamp taxes, (2) taxes on forest products and concessions, (3) taxes on estates, inheritances, gifts, 1/ The new local government tax code, P.D.231, gives provinces specific taxing powers for the first time. 4 ~- ly9 - legacies, (4) income taxes, (5) motor vehiple A (6) customs duties and charges, (7) taxes on any kind of bank or insurance company, (8) export taxes, fees, and other levies on Philippine manufactured or processed products, (9) taxes on goods coming into or passing out of a jurisdiction, and (10) taxes or fees on agricultural products.1 However, P.D.231 is expected to strengthen the city and provincial finances through tranxfer of the occupation tax and amusement tax from the 2/ national government to provincial and city governments. In addition, P.D.231 expressly extends the taxing power of provinces to include a sizeable number of other levies. This point is elaborated on in the final section of this paper. Despite this extension of taxing powers, provinces continue to be relatively limited in their revenue sources, and, in particular, they are not permitted to use the primary sources of city and municipality revenues listed in Sections 19, 20, and 21 of the Local Tax Code. Municipal license taxes and fees upon persons engaged in certain occupations or businesses are a major revenue source open to municipalities and cities. P.D.231 establishes maximum rates for the gross receipts taxes and license fees applicable to the various types of businesses. The taxing authority of cities, moreover, exceeds the taxing powers of provincial and municipal levels of government. P.D.231, Section 23, specifies that cities "may levy and collect, among others, any of the taxes, fees and other 1/ P.D.231, Section 5. Section 2 of R.A.2264 (as amended by R.A.hb97 and R.A.5752), specifically prohibils cities, municipalities or municipal districts from using taxes here listed as (1) through (8), and also prohibits the use of the residence tax and taxes on printing and publishing businesses. 2/ Prior to P.D.231, only 17 percent of these revenues went to local governments - 13 percent to the provinces and cities and 4 percent to the municipalities. Under the new law 100 percent of the amusement tax is to go to the provinces, and revenues from the occupation tax will be divided between municipalities and provinces, in shares of 30 percent and 70 percent, respectively. Had this revenue shift been made in 1970 it would have led to slightly less than a 5 percent increase in local revenues. 3/ P.D.231, Section 19. 4 - 20 - impositions that the province or the municipality may levy and collect ... The rates of the taxes, fees, or other impositions that the city shall fix may exceed the maximum rates allowed for the province or municipality by not more than fifty percent," except that the rates of the occupation tax, amusement tax, and fees for weights and measures are to be the same for the province and city. In addition, cities are allowed to use in lieu of the gross receipts tax a sales tax with rates up to 2 percent on non-essential commodities and a 1 percent rate on essentials. Cities can also levy taxes on articles subject to specific tax under the provisions of the NIRC but the rate can be no more than 25 percent of the NIRC rate. The Secretary of Finance has the power to review local tax ordinances; Presidential Decree No.145 broadened this power. The Secretary may suspend an ordinance within 120 days after receipt of a copy of it if he deems the tax or fee excessive, oppressive, confiscatory or contrary to national economic policy. Real Property Tax , The most important local tax for Metropolitan Manila governments is the real property tax. Though this tax is authorized by the national govern- ment, it is, for all practical purposes, a local tax since the legislative bodies at the provincial and municipal level must pass implementing ordinances. For cities, the power to tax real property is found in their charters; specific rates are also indicated there. The tax is collected by the city and municipal treasurers and accrues almost entirely to the local governments. 1/ "Non-essential" and "essential" items are not defined in P.D.231. 2/ City taxes on petroleum products reportedly have recently been prohibited. The real property tax is an ad valorem tax on the assessed value of land and improvements. The authorized range for the basic rate of the real property tax is indicated in Table 6, as is the distribution of the revenue from the basic rate. The Barrio Development Fund receives 10 percent of the total. This is a fund for community development projects which is managed by the provincial treasurer. Additional authorized taxes on real property include a 0.25 percent tax for the bario (R.A.3590), a 1.0 Oercent tax for the Special Education Fund (R.A. 5447) and a 0.125 percent tax within Metropolitan Manila for the Metropolitan Flood Control Fund (P.D.18)* A maximum rate of 3 percent for the basic and additional real property tax was set by R.A.5h7. If the cities in Metropolitan Manila were to tax at the maximum rates authorized (see Table 2), they would surpass this 3 percent limit. Probably no such case has arisen, however, since the 0.125 percent tax for flood control has not gone into effect and very few barrios levy their 0.25 percent additional tax.!/ The base for the real property tax is the current market value as estimated by the local assessor. In practice, however, the assessment ratio is substantially less than 100 percent and is thought to vary widely among local governments within the MA. Under P.D.76 the base for the real property tax will change to a specified percentage of the assessor's new estimate of current value. The assessment levels established by P.D.76 are compared in Table 7 with those compiled for 1967 by the National Tax Research Center. The percents (assessment ratio) vary, depending on land use, range from 50 percent for commercial and industrial land to 30 percent for residential land. 1/ The tax for the Flood Control Fund can be levied and collected only if and when the funds generated by the special metropolitan flood control tax on theater admissions are not sufficient to cover the flood control and drainage program. 2/ Also, many cities do not levy the maximum authorized basic rate; e.g. Caloocan and Quezon levy only 1.5 percent, and some cities, like Manila, are not divided into barrios. - 22 - Table 6: AJTHORIZED PPERTY TAX RATES AND DISTRIBUTION OF POPETTY TAX COLLECOOTOIS Municipality City BASIU RATZ Uity -- 7/8 - 2% Province 1/8 - 1/2 -- Municipality 1/4 - 1/2 -- (distribution) 45% Province 90% City 4S% Mnicipality 10% Barrio Develop- 10% Barrio Devel- ment Fari opment Fund Additional Tax BARRIO 1/4% 1/4 " (distribution) 100 Barrio 100% W-arrio AdAitionai Tax. SPEC. EJUU. FTVi f 1a (distribution) 501 Municipality 6o City 20% Province 40% Nation (Stabil- 30% Nation (Stabil- ization Fund) ization Fund) Adaitional Tax 2/ FLOOD CONTROL FUND 1/8 % 1/8 a (distribution) 100% Metropolitan 100% 6tropolitan Flood Contr. Fund Flood Contr.Fand SUM OF MAXIM4 AUTH- ORIZED RATES 2 3/8 % 3 3/8 % (distribution) 14.7% Barrio 13.3% Barrio 40.0% Municipality 27.1; City 5.3% Metropolitan 3.7% Metropolitan 27.4% Frovince 11.9% Nation 12.6, Nation Source: C.A. 470; R.A. 3590; R.A. 54h7; P.D. 76; P.D. 18. 1/ In the past, the local government's share went entire2y to the Special Education Thnd. Beginning with FY 1974, the increase in funds retained by the local governments over the amount they kept in FT 1972 will be di-ided equally between the General Fund and the Special Education Fund of the local governments (P.D. 76). 2/ Mtropolitan Manila only. Not yet put into effect. - 3 - Table 7: ASSESSMENT RATIOS BY TYPE OF PROPERTY Type of Property NTRC 1967 Estimates P.D.76 Agricultural Land 40.8 40.0 Industrial Land 43.2 50.0 Comercial Land 39.9 50.0 Residential Land 41.8 30.0 Residential Buildings 59.3 15.0 to 80.0 Commercial and Industrial 64.1 50.0 to 80.0 Buildings Sources: National Tax Research Center, 14th Annual Report, 1972 (March, 1973), p.59; and P.D.76. -214 - The base for improvements on commercial, industrial and agricultural land will be the same percentage of market value as it is now (i.e., assessor's estimate of market value prior to June 30, 1973, as a percentage of assessor's new estimate of market value, which is supposed to represent true market value) unless this percentage is less than the percentage for land (i.e., 40 percent or 50 percent as the case may be) or more than 80 perceht of true market value. In such cases, the local assessor will establish the base for improvements between the percentage for land (i.e., 40 percent or 50 percent) and 80 percent of true market value. The assessed value of improvements on residential land varies from 15 percent of the new estimate of current market value when this value is P30,000 or less and up to 80 per- cent when it is P500,000 or more. P.D.76 leads to three types of differentiation in assessment ratios. First, the assessment ratios vary for lands being used for different purposes. Second, differential assessment ratios are applied to residential buildings depending on their value and to comercial and industrial buildings depending on their past assessment ratios. Third, assessment levels between land and improvements, whatever the use, differ. The logic for differentiating assessment levels by land use is not clear since there is no apparent gain to be derived from taxing residential land more lightly than, say, agricultural land. Such measures le,i tn diptnrtion in Innd ain hy loworti it..s enst, In ono use helow that in another. Unlike correct zoning, this differentiation does not tend to foster a pattern of land use which helps rndice noft-i_ve ert.ernalition and increase positive externalities. Differing land assessment ratios also make it necessary to classify vacant lands carefully so they are assessed at the right level -- an additional burden to place on an already strained administrative apparatus. Likewise, the need to classify vacant lands for tax purposes would lead to more challenges by taxpayers and, again, a need for more administrative resources. Assessment ratios for residential buildings are made up of nine steps ranging from 15 to 80 percent. Such a graduated tax might be justified on equity grounds, but it is bound to create significant difficulties for assessors. The range of possible assessment levels will surely lead to more challenges by taxpayers, and administrative headaches will multiply. An additional problem is that at the margin, as improvements move fran one assessment bracket to the next, the tax rate in terms of property value may exceed 100 percent. It is true that the new low assessment ratios for the most inexpensive housing will encourage the construction of these types of improvements, but this might be occurring at the cost of an undue burden on the property tax administrative apparatus. The third differential is that between improvements and land. Though much can be said for taxing land more heavily than improvements, this does not always occur under P.D.76. Under this statute, in some cases residential improvements are taxed more heavily than the land on which,they are located. In other cases the reverse is true. So the existing differentials in assessment ratios between land and improvements cannot be supported on the basis that land is taxed more heavily than improvements. In fact, certain types of improvements, particularly higher value improvements -on roaident i 1 1 =nd, will b enyial i zod by the new pr(iiort.y tax sy,t.nm, thereby discouraging investment in housing and an optimal pattern of land use. Since it appears that the spirit of this assessment pattern is to improve the equity of the property tax system, an alternative approach might have involved a differentially higher assessment ratio on higher valued land. However, given the relatively high income elasticity of housing consumption in the Philippines, effective taxation of improvements may well - 26 - be a useful means of distributing taxes in the country. For this reason, taxing land more heavily than improvements may not be appropriate at this time. The percent of estimated market value subject to the property tax is to be revised every five years by the provincial and city assessors. No increase in the assessment level at this time can be greater than 10 per- cent. 1/ These restrictions on the frequency of assessment revision and the amount of increase in assessment level as a percent of estimated market value do not apply if the land use of a piece of property has changed. Over the longer run, this type of limitation on reassessment will do little to reduce tax competition in the metropolitan area. Since increases in assessment ratios are optional, identical properties in adjacent jurisdictions which are both initially assessed at 50 percent, may be assessed at 50 percent in one jurisdiction and 80 percent in the other after 25 years. This seemingly complicated system for determining the base for the real property tax was devised in order to raise the effective property tax rate gradually. Property values were badly underestimated by the local assessors prior to June 30, 1973. The new schedules of property values that the local assessors are currently preparing are supposed to represent true market values. Therefore, even though only a percentage of the estimated market value is to be taxed, whereas before, the entire estimated market value was taxed, the new estimated market value figures will be so much larger than the old estimates that revenue from the property tax is expected to increase under the new system. P.D. 76 also increases penalties for non-payment. A taxpayer will be-subject to a penalty of 2 percent on the amount of the delinquent tax for each month of delinquency, though in no case shall the total penalty 1/ E.g., for commercial land, the tax base could be raised fran 50 percent of estimated current market value to 55 percent, but not more. - 27 - exceed 24 percent of the delinquent tax. Fines for deliberately making a false declaration of property value or deliberately failing to make a declaration may be imposed, upon conviction, ranging from P500 to P10,000. In addition, P.D.76 requires all persons owning or administerina real property to file sworn statements of the ft-t market value of their property with the provincial or city government. In the case of government expropriation of private land, either this self-declared valuation or the local assessor's valuation, whichever is lower, will be used to compensate the owner. Any property owner who is dissatisfied with the local assessor's assessment of his property may appeal his case to the local Board of Tax Appeals within 60 days after receipt of his assessment notiee. The appeal shall be decidedvwithin 60 days from receipt of the case. At the time of this writing the initial effects of P.D.76 are still not known. The Manila City Assessor and Rizal Provincial Assessor expected increases in assessed values of 100 percent and 70 percent, respectively. The increase in the effective rates of property taxation which would result from increased assessments have, in any case, already been slightly dampened by P.D.391 which allows a 20 percent property tax discount in 1974, 15 percent in 1975, 10 percent in 1976 and 5 percent in 1977, provided that in no case will the tax be lower than in the preceding year. Special Assessments Accordinig to the Assessment Law (C.A. 470), local governments are authorized to collect a special assessment from property owners who benefit from property improvements provided by the local government. Cities or municipalities can levy a special assessment by ordinance on property owners who benefit from the improvement, not exceeding 60 percent of the total cost of the improvement (including the cost of land acquisition). Implementation procedures for this tax need to be clarified. The special assessment has rarely been used. - 28 - Other Local Taxes Up until mid-1974, municipalities and cities could levy a sales tax on gasoline sold or distributed within their boundaries, according to R.A.1435. The tax rate was to be fixed by city or municipal council ordinance, but could not exceed 25 percent of the rates fixed by the national government. However, in 1974, after the national government had more than tripled the gasoline tax in less than a year (up to 25 centavos/liter), the right of local authorities to collect a specific tax on gasoline was revoked v apata a e ot centav. The proceeds from this additional 4 centavo levy are to be allocated to local governments as in P.D.144 (discussed later). Cities may still impose sales taxes on other items, among them all other articles subject to specific taxes, such as spirits, wines, fermented liquors, tobacco, cigars, cigarettes, matches, firecrackers, coal, cinematographic films, playing cards, saccharine, etc. Minor taxes, such as the frontage tax on commercial land fronting public thoroughfares, are also levied by cities and municipalities. Barrios have the authority to levy a tax on gamecocks owned by residents of the barrio, and on cockfights (R.A. 3590). Licenses Licenses are the second largest source of own revenue, after the real property tax, in Metropolitan Manila. Various acts empower municipalities and cities to impose license taxes on persons engaged in occupations or businesses or exercising privileges in their specific jurisdiction (Acts 2711 and 3790 and R.A. 2264). The rates are fixed by the city or municipal council and are collected quarterly or annually, depending on the ordinance. Maximum rates for cities and municipalities have now been established by P.D.231, as previously noted. - 29 - The special license tax may be imposed by cities and municipalities on persons or entities engaged in contracting, enlisting, recruiting or transporting laborers (Act 2486). This license tax of P500 is payable annually. It must be paid before a business can lawfully begin to operate. Barrios have the authority to levy a license tax on stores and on signs and billboards exposed to public view, except those at the place where the business advertised is conducted (R.A. 3590). Fees R.A.2264 as well as city charters authorizes cities and municipalities to impose fees on persons engaged in any occupation or business in their jurisdiction, for services rendered by them and for public purposes. Numerous other acts and most recently P.D.231, specify authority to impose specific fees. The most important fees include: fishery fees, regulatory fees (on unwholesome or dangerous occupations or businesses), cattle registration fees, secretaries' fees, tuition fees, building permit fees, milk and meat inspection fees, electricians' fees, boiler and gas inspection fees, sheriff's fees, marriage license fees, and burial permit fees. Provincial boards may charge moderate tuition fees in provincial schools above the primary level, if they obtain the approval of the Department of Education. User Charges and Commercial Revenue Cities and municipalities may impose charges for services rendered by them. As corporate bodies, I oca. governments may operate public utilities such as electric light and power systems, telephone systems, markets, slaughterhouses, ferries, rock quarries, transportation systems, toll roads and bridges, ice plants, workshops, cemeteries, and others. They may lease or sell such public utilities. Under E.0. 270, cities and municipalities may charge a berthing fee on each vessel stopping at their piers or wharves. - 30 - These fees are to be used exclusively for the maintenance and improvement of the port at which they are collected. Public markets and slaughterhouses are administered under the supervision and direction of the provincial or city treasurer. Toll rates may be fixed for the use of roads, bridges or ferries, as long as the local government has the authorization of the President of the Philippines and the recommendation of the Secretary of Finance. Proceeds from tolls are used for paying off loans or bond issues and for repair and maintenance. Rents and Fines Rents are collected on the administration of property owned by the government. The local government treasurers administer such property. (Rent from market stalls is not included in this category, but rather in commercial revenue). Certain fines are imposed at the local government level, e.g., for the misuse of public forests. Penalties are imposed for failure to pay certain taxes or licenses, e.g. the real property tax, internal revenue licenses, municipal licenses, special licenses, special assessments, weights and measures, and others. VI. REVENUE PATTERNS Trends In 1970, about 70 percent of the total revenue in the Metropolitan Nnni In Ar'm- f w-1-: rI - ri Pr,lfn rr- 'Yur Flf I.-. InI -f. ', , -- , I , half Vdo from whu real propurty Lax, and about one quarter from municipal and city licenses. The other quarter consisttd of user charges, fees, the gasoline tax, fines, rent, borrowing, and inventory and other adjustments. (Sqe Table 8). Revenue from the real property tax increased fairly rapidly from 1960 to 1970, i.e., at an average annual rate of 15.8 percent, compared to 6.4 percent for license revenue and 10.6 percent for total revenue from - 31 - Table 8: REVENUE OF MANILA METROPOLITAN AREA (P 000's) 1960 1965 1970 % of % of % of Total Total Total Total Total Total Current Revenue, Own Sources 70,375 83 109,537 65 183,197 65 Local Taxes 51,874 62 83,224 49 154,990 55 Real Property Tax 21,961 26 39,645 23.5 95,933 34 /3 Municipal Licenses /1 26,784 32 39,788 23.5 49,698 18 Gasoline Tax 1,600 15 1,800 1 3,400 1 Other Taxes /2 1,529 1.5 1,991 1 5,959 2 Fees 3,929 5 6,147 4 7,695 3 User Charges 13,525 16 18,584 11 17,996 -64 Fines 651 0.5 1,113 1 2,022 ;1 Rental Income 396 0.5 469 -- 494 - Capital Revenue, Own Sources 1,755 2 2,460 1 14,952 5 Borrowing 439 0.5 1,201 0.5 58 - Inventory, & Other Adjustments /4 1,316 1.5 1,259 0.5 14,894 5 Total Revenue, Own Sources 72,130 85 111,997 66 198,149 70 Inter-Governmental Assistance 12,276 15 57,027 34 84,715 30 Internal Revenue Allotment 9,778 12 52,394 31 79,398 28 Grants-in-Aid 2,497 3 4,633 3 5,318 2 Total Revenue 84,406 100 169,023 100 282,864 100 /1 Municipal licenses are referred to in the Philippines as taxes. As a category it includes both taxes (e.g., annual and quarterly taxes on certain business receipts) and licenses (e.g., fixed annual charges on certain business). 2 This is a calculated residual. /3 Incldes proceeds from the 1 percent additional charge for the Special Education Fund. 14 Includes increases in the book value of property and refunds of disburse- ments illegally or erroneously made during preceding years. Source: Data supplied by Philippines Government officials. - 32 - own sources. (See Table9 ). Much of the increase in real property tax collections resulted from an increase in rates between 1965 and 1970 following the introduction of the 1 percent additional charge for the Special Education Fund. However, even between 1960 and 1965, when there was no rate increase, revenue from the real property tax grew at an average annual rate of 12.5 percent. This would suggest a fairly high degree of elasticity of the property tax relative to other locally raised revenues. The total revenue of the Manila Metropolitan Area accounted for 28.3 percent of the total revenue of all local governments in the Philippines in 1970, compared to 30.0 percent in 1960. In 1970 MA accounted for only about 12 percent of population in the Philippines. The total revenue of NMA derived from its own resources accounted for 37.6 percent of that for all local governments, while that from the real property tax and licenses accounted for 52.7 percent and 48.3 percent, respectively, of that for all local governments. In contrast, central government assistance is not as important for Metropolitan Manila as it is for other local governments in the Philippines. MMA's internal revenue allotment accounted for 20.7 percent of the total received by all local governments, and its share of total grants-in-aid to locAl governments was only 5.8 percent in 1970. Revenue from Own Sources Property Taxation. In almost alljurisdictions in 1970 the most important 1/ locally raised revenue source was the property tax. The per capita level of the property tax varied widely within the MMA, ranging from P53.37 for Maksti and P37.53 for Manila City, the two highest, to P2.04 for Pateros and P2.72 for Noveleta. Local governments which raised a relatively high amount per capita from the property tax are listed in Table 10. 1/ The exceptions are: Cavite City, Binan, Cainta, San Mateo, and Taytay, which all raised more fran user charges than from property taxes in 1970. However, in 1965, of these local governments, only San Mateo earned more from user charges than property taxes. - 33 - Table 9: REVEWUE OF HMA: PERCENT AVERAGE ANNUAL RATE OF CHA!GE 1960-65 1965-70 1960-70 Current Revenue, Own Sources 9.2 10.8 10.0 Local Taxes 9.9 13.2 11.6 Real Property Tax 12.5 19.3 /3 15.8 /3 Municipal Licenses /1 8.2 4.5 6.4 Gasoline Tax 7JI OtheTxe /2.h20 i1..6 Fees 9.4 4.6 7.0 User Charges 6.6 - 0.7 2.9 Fines 11.3 12.6 12.0 Rental Income 3.4 1.0 2.2 Capital Revenue, Own Sources 7.0 44.0 24.0 Borrowing h/ 22.0 -- - 12.3 Inventory & Other Adjustments - 0.9 64.0 27.5 Total Revenue, Own Sources 9.2 12.1 10.6 Inter-Governmental Assistance 36.0 8.2 21.3 Internal Revenue Allotment hO.0 8.7 23.3 Grants-in-Aid 13.2 2.8 7.9 Tbtal Revenue 14.9 10.9 12.9 1/ Nunicipal licenses are referred to in the Philippines as taxes. As a category it includes both taxes (e.g., annual and quarterly taxes on certain business receipts) and licenses (e.g., fixed annual charges on certain businesses). 2/ This is a calcul.ated resichil. 3/ Includes proceeds from the 1% additional charge for the Special Education PhInd. h/ Includes increases in the book value of property and refunds of disburse- ments illegally or erroneously made during preceding years. Source: Calculated from Table 8. -34 - Table 10: PER CAPITA PROPERTY TAX REVENUES IN SELECTED JUISDICTIONS, 1970 Makati 1 53.37 San Juan R 18.58 Manila City 37.53 Cainta 17.38 Rosario 37.30 Marikina 17.09 Quezon City 32.34 Malabon 15.40 Pasig 26.87 Caloocan 15.39, Pasay 22.15 Mandaluyong 19.09 Source: Data supplied by Philippine Government officials. The difference in both the total revenue and the total property tax revenue raised by local governments is an indication of the considerable interjurisdictional differences in econcmic activity, income, and real property values as well as rate variations. In this light, it is not surprising that Makati, the wealthiest area in the metropolitan area, has the highest level of property tax per capita, nor that the core city of Manila raises a high level of property tax per capita. The effective tax rate, i.e., the ratio of tax collected to the market value of the property, is a good indicator of overall tax effort. Unfortunately, market value data are available for only selected areas in Metropolitan Manila (see Table 11). These figures suggest that Manila and Pasay are making a greater effort than Caloocan and Quezon. Unfortunately, there are not available data which distinguish total market value and total collections for residential property from that for industrial and commercial property. Hence it is not possible to determine the extent to which there are interlocal variations in residential property tax burdens. TABLE 11. EFFECTIVE REAL PROPERTY TAX RATE IN METROPOLITAN MANILA, 1972 Taxes Collected Market Value Effective Tax Rate/a 1972 Dec. 1971 1972 (%) Manila P 58,147,355 P 5,210,822,230 1.1 Caloocan 6,494,565 941,485,320 0.7 Pasay 5,339,347 535,025,770 1.0 Quezon 31,931,673 6,021,277,100 0.5 /a Ratio of taxes collected to market value. Property tax collections for 1972 were estimated by: (1) deducting property tax collections for the Special Education Fund in 1970 from total property tax collections by assuming that the additional tax for the Special Education Fund as a percent of total property tax collections (61.4 percent) for the nation in 1971 held for the above four cities in 1970; (2) by using these figures to compute the compound annual average growth rate for real property taxes from 1960 to 1970; (3) by using these rates to calculate 1972 taxes collected; and (4) by assuming the same relationship cited in (1) to calculate total real property taxes in 1972, including the additional tax for the Special Education Fund. Similar rates were calctlated for selected municipalities in Rizal, but they made no sense. It seems as though the estimates used for market value from the 14th Annual Report of the National Tax Research Center may have been misquoted, as they appeared to be extremely undervalued. Sources: Taxes collected: Manila Bay Metropolitan Region Strategic Plan =11d Nat I-=! T- roloaroh ct ar, "Nvonu St.ritul,11ro of Metro Manila", Working Paper No.7. Market Value, December 1971: National Tax Research Center, lth Annual Report, 1972, p.59. - 36 - Failure to implement fully the propei'ty tax in the Metropolitan Manila Area, as in other areas of the Philippines, has resulted from underassessment, inefficient collection and enforcement, and in some cases failure to utilize the maximum allowable rate. Manila and Pasay cities both tax at the maximum basic rate of 2 percent. However, Quezon and Caloocan only tax at 1.6 percent. Of crucial importance to the success of the recent decrees pertaining to the property tax is the state of property tax administration in the country, and in the MMA in particular. A permanent improvement in property taxation in the MMA is dependent upon steps being taken to ensure that assessment standards are improved and increased effective rates of property taxation enforced. Additional administrative resources are clearly needed for these purposes. In Rizal Province early in 1974 there were only 9 assessors to value or revalue 500,000 parcels -- 56,000 parcels per assessor. In Manila the picture was significantly better with 30 assessors for 150,000 parcels -- 5,000 parcels per assessor. Clearly Manila is in a better position to take advantage of the provisions of P.D.76 than is the province of Rizal, or probably most other cities and provinces. In most local governments in the Philippines, only two revisions in assessments of the market value of property were made during the period 1/ 1945-1967. Department of Finance estimates of the assessment ratio (estimated market value as percent of true market value) in various cities and municipalities in Metropolitan Manila during December 1971 are presented in Table 12. 1/ Joint Legislative-Executive Tax Commission, Second Survey on Local Finance, 1972. - 37 - Table 12: ASSESSMENT LEVEL OF REAL PROPERTY IN METROPOLITAN MANILA, 1971 Percent Manila 50 Caloocan 35 Pasay 44 Quezon 24 Makati 37 Malabon 18 Mandaluyong 26 Navotas 13 Paranaque 19 San Juan 20 Source: National Tax Research Center, 14th Annual Report, 1972,P.59. At least in the case of Manila, the estimates made, by the Department of Finance for Decemb r 1971 do not apply today. According t6thXq Manila City Assessor, the present average assessment ratio in Manila City is 25 percent. This partially explains his expectation of at least a doubling of revenue from the property tax in 1974 when P.D. 76 was to go into effect. Reclassification of real properties based on actual land use will accompany the self-declaration of market value process and the revision of 1/ the schedule of land values. The unevenness in the degree of underassessment in different areas wibhiii the MMA results in substantial inequity, as is indicated in the above figures. A more specific example of inequity in assessment is evident when one compares the assessed value of property in Forbes Park, the wealthiest residential area in Makati, with that in two government low-inccme housing 1/ This concept of self-assessment as included in P.D.76 is an old idea which has usually done little to increase property tax revenues. However, self-assessment may initially help to identify properties not yet on the property tax rolls, but it will not serve as a substitute for thorough periodic assessments and reassessments by local assessors. - 38 - projects, Projects No.6 and No.8. Land in both places is assessed at P150 per square meter, though the low-income housing projects are in areas where the market value of land is much less. Collection of the property tax is rather poor. Table 13 shows that local governments collected only 55 percent of total billings on the basic real property tax and b percent on the one percent additional tax for the Special Education Fund in 1971. Table 13: COUNTRY-WIDE REAL PROPERTY TAX COLLECTION FOR 1971 Collected Collectible Ratio (000) (000) (M Basic Real Property Tax P 132,802 P 241.,231 55 1 Percent Additional Tax 83,569 203,802 41 Source: National Tax Research Center, 16th Annual Report, p.61. According to a national survey of local finance in 1967 by the Joint Legislative-Executive Tax Commission (now tae National Tax Research Center) both the offices of the treasurer and the assessor tend to be inadequately staffed, and officials are generally lax in enforcing the law. Furthermore, local assessors' offices have few, if any,trained valuers. More often than not, they have no tax map and at least half of the land has not been included in a cadastral survey. Other Revenue from Own Sources. Where additional levy could be imposed byv cities and municipalities on gasoline of various types, i.e., 25 percent of the national levy, it was imposed by all five cities but by only 40 percent - 39 of the municipalities in Metropolitan Manila. Manila, Quezon, Caloocan and Pasay levied only 12.5 percent of the national levy, while Cavitg levied 25 percent. The rates levied by the imnicipalities varied from 7 percent to 25 percent of the national levy. The per capita level of the license revenue and user charges varies widely within the MMA. Per capita revenue raised from these sources in 1970 in various localities is presented in Table 14. Table 14: LOCAL PER CAPITA REVENUES FROM LICENSES AND USER CHARGES, 1970 Per Capita Per Capita Locality License Revenue User Charges Manila p 24.80 R 5.01 Makati 8.52 2.29 Las Pinas 7.92 1.69 Mandaluyong 7.10 2.02 Quezon 6.68 2.61 Pasay 6.89 6.34 Cavite 2.51 5.34 Cainta 5.19 46.35 Rosario 0.21 15.33 Pasig 5.73 9.h8 San Mateo 0.65 6.86 San Juan 3.52 5.65 Navotas 0.23 0.38 Noveleta 0.-5 0.42 Paranaque 4.63 1.32 Taguig 0.68 0.23 Source- Data supplied by Philippine Government officials. 1/ NTRC definition of Metropolitan Manila. - 40 - License tax practices in the MMA may differ with respect to base, rate and coverage. Among the cities, Manila has the least number of occupations (11) subject to the tax, and the lowest rates. Cavite levies the tax on 24 occupations, Caloocan on 30, Quezon on 61 and Pasay on 66. The municipalities levy a license tax on from 0 to 93 occupations. Similarly, there are significant variations in the imposition of the license tax on persons engaged in business within the MMA. Levies on various types of entertainment are riven In Tpble 11f. Tabe 15: LICENSE TAXES ON VARIOUS MTERTAINMENT ( ESTABLISHMENTS, 1970 Cabarets & Night Clubs Dance Halls Bars Theaters Manila R 500 q - P 16 - 5O q P 75o - 4800 a Quezon 500 - 600 q P1500 - 3000 q 40o - 600 q 200 - 400 q Pasay 900 - 1200 q - l00 - 600 q 200- 300 q Caloocan 350 - 500 a 300 - 650 a 20 - 500 q 10 - 300 q Cavite - 800 - 1200 a h00 a 1000 a Makati 1500 - 6000 a - 600 -2000 a 360 a San Juan 1.200 a 380 - 750 450 a 1800 - 2500 Madaluyong 200 a 600 a 300 - 400 250 - 50 Marikina 2000 a 2000 a 1500 2000 a + Plus PbOO/month amusement tax q = quarterly a = annually Source: Data supplied by Philippine Government officials. A similar pattern is observed for the collection of fees (e.g., secretary's feel, tuition fer,fig hnry fees ndbuiTd i nfy f)orj j user charges and receipts from operations (e.g. markets, slaughterhouses and cemeteries). There are arguments for creating a uniform rate and base schedule for these fees: to increase the overall revenue of the MA, to improve interjurisdictional equity within the MMA. and to prevent competition between local governments within the MMA to attract businesses by granting unwarranted tax incentives. The new Local Tax Code, P.D.231, establishes maximum rates for the gross receipts taxes and license fees applicable to the various types of businesses. In municipalities gross receipts tax rates on manufacturers, exporters, importers, retailers and wholesalers can go as high as 2.4 percent; and for businesses providing services, they can be up to over 4.5 percent of gross receipts. As earlier noted, the rates set by cities may exceed the maximum rates permitted municipalities by as much as 50 percent. At least two problems exist with the maximum rates and rate structure specified in P.D.231. First, the amount of tax is not smoothly graduated with gross receipts, so it is possible for a business having lower gross receipts to pay a higher percentage of gross receipts as tax. Under section 19c, if gross receipts are P300,000 the municipal tax rate can be as high as 4.4 percent, but it can only reach 2.3 percent if gross receipts are P1,000,000. Second, the maximum rates of the gross receipts tax seem unduly high, up to 6.5 percent in municipalities and 6.7 percent in cities, on business establishments principally rendering services. Moreover, permitting rates this high but allowing each local jurisdiction to determine its own rates encourages tax competition -- something currently in need of reduction in the MMA. Problems and Issues Like most big city governments in LDC's, local governments in Metropolitan Manila are faced with a mismatch between the expenditure requirements implied by the functions which they must provide, and the size of the bases from which they may raise revenues. In Manila, this imbalance is compounded by governmental fragmentation, i.e., the revenue-expenditure mismatch is generally less severe for wealthier governments,and public service level disparities, or tax burden disparities, result. The first of these problems might be viewed as an inadequate level of local government - 142 - resources (and would exist even under a metropolitan government) and the second might be viewed as an uneven distribution of those resources that are available. Utilization of Tax Powers. The governments in the Manila Metropolitan Area suffer from inadequate local government financial resources, and in the last decade their reliance on national government assistance has increased. However, these local governments have also failed to utilize fully the powers granted to them in various acts and charters. These failures include not using available tax bases (e.g. special assessments), underassessment in the case of tax bases presently being used (most notably the property tax) and inefficient collection procedures. Codification of local government revenue ordinances can improve the implementation of existing ordinances. In many cases, the existing ordinances have not included certain tax bases authorized in national acts or city charters, nor have they set the maximum rate authorized. The National Tax Research Center has assisted some local governments (e.g. Marikina, Rosario, Kakati and Cavite) by codifying their revenue ordinances, i.e. compiling, classifying and updating all revenue and regulatory ordinances for a city or municipality. Tax effort is not easily measured for a metropolitan area, but even a rough estimate might provide useful information here. If, for example, Metropolitan Manila governments were, in total, making an adequate effort, then the problem might be judged as more related to the inadequate provision of legal taxable base (and/or subsidy) to the local governments. As may he seen from the data in Table 16, estimated per capita expenditures in the MA area by all levels of government (as a percent of per capita personal income) are lower than in the other cities exanined here, with the exception o' Pangkok. :iUle 16: CO?PARATIVE FISCAL EFFORTS OF SELECTED METROPOLITAN AREA G0VEW TS (All in US$) Manila Seoul Ahmedabad BoUta Cajra Somba, Jakarta Kingsgton Banxkokc 1970 1971 1971 1969 1970 1971 1971/2 1971/72 1970 Population 4A03 %,891 1,588 2,339 324 $,971 4,576 $66 2,268 (it thousands) Per ,apita Inace 193 37$ 762t (1970)501 256 (1970)283 135 774 311 (S) Per Capita Exenditure Setfopolia Area ' 25 81 48 71 42 63 18 138 14 a. Cit? 10 29 20 $6 14 26 7 16 10 be State 15 - 13 24 -I a* Federal 15 $2 13 15 15 13 11 128 4 Tbtal per Capita 13.0 21.6 63.2 1.2 16.4 22.3 13.3 17.8 4.5 EMenditure (a+b+c) as a Percent of per Capita Income Per Capita Local Govewint 6.4 28 17 $2 16 14.5 7.2 15.26 12.3 Revenue As a Percent of Total 3.3 7.5 22.4 10.3 6.3 5.1 5 5.3 2.0 4.0% Income Pir Capita local Govern?mt 3.0 24 16 $1 15 14.0 4.0 4.9 12.1 Revenue from Own Sourcer As a Percent of per Capi-A 1.6 6.4 21.0 10.2 5.9 4.9 3.0 0.6 3.9 Income Tr The fSture generated er te l govermant ie ure is the per Caplil frgure o s"ederal o07*aMent spending. 'a is, we assum the govrnment spends the per capita amount for each citizen regardless of location. To the extent the feder&l government qeads more or Ifss than the national average amount in the metropolitan area, the figure for federal government spending , * the etropolitan area will understate or overstate respectively the true level of federal per capita xhditukes in the ;*tropolitan area. A similar argument applies to the estimate of atate government spending in the metropolitan area. Estimated values Set e Report, Urban Fublic Finance Project, Appendix I. Estimste for Gujarat State, 1968-69. l Department of Statistas Estimate, 1971. Similarly, revenues raised from local sources by MMA local governments,as a percent of income, are lowest, with the exception of Kingston. Finally, the level of tax effort exerted by the national government has been estimated as being well below the developing country average. These results, thouOh clearly rough estimates, might be given the following interpretations on a per capita basis and as a percentage of income, the national government in the Philippines is a relatively low spender, and local governments in the YMA add to this expenditure at a lower rate than do urban local governments in some other countries, even after adjustments for income differentials are made. In sum, this evidence would seem to suggest that the revenue problem in Metropolitan Manila is at least partially due to an inadequate revenue effort. Quite apart from the possibility that taxable capacity is not used intensively in the metropolitan area, is the possibility that taxable capacity is being used at differential intensities within the MMA, i.e., that there is a tax effort disparity among jurisdictions. As previously noted, when cities and municipalities were free to levy taxes on gasoline up to 25 percent of the national levy, they did not uniformly take advantage of this right. It is possible to point to the substantial differences in revenue raised per capita among cities and municipalities,as a rough indication of at least disparities in public service levels provided, if not in tax effort. In 1970, cities within the NMA raised on the average Ph2.95 per capita locally, while the municipalities raised on the average P18.67 per capita. The per capita revenue from own sources for 1970 is given in Table 17. The range of variation in per capita revenues raised from own sources is wide indeed. In 1970, the average for the five charter cities was P42.95 but the range was from P14 per person in Cavite City to P80 per person in Manila City. Among the 23 municipalities 1/ See for example, Roy W. Bahl, "A Regression Approach to Tax Ratio and Tax Effort Analysis in Developing Countries". International Monetary Fund Staff Paper 18, no.3 (November, 1971). Table 17: PER CAPITA REVENUE FROM OWN SOURCES, 1970 City or Municipality Pesos Manila 80.17 Quezon 48.14 Pasay h1.70 Caloocan 30.23 Cavite 14.20 Makati 70.85 Mandaluyong 34.30 San Juan 32.30 Marikina 28.83 Cainta 73.44 Rosario 66.97 Taguig 5.38 Taytay 14.63 Pateros 4.07 Source: Data provided by Philippine Government officials the range was from Ph per person in Pateros to P70 per capita in Makati. The standard deviation among municipalities in per capita revenues from own sources is 70 percent of the mean. Without some indication of the fiscal capacity of these jurisdictions, it is not possible to estimate tax effort disparities from these variations in revenues raised from own sources. Still, the range and variability of these per capita amounts makes the existence of major fiscal disparities a plausible hypothesis. A nimplo 1n+mrrjuri-adici on menurn of tax erfort would he a comparison of revenue raised from own sources with the income level. Unfortunately, personal income estimates for the localities in the Metropolitan Manila Area are not available. One dubious possibility for roughly approximating tax effort is to measure taxable capacity in terms of national government personal and corporate income tax collections by city in 1970 (see Table 18), which gives some indication of the relative level of corporate and personal income tax Table 18: NATIONAL GOVERNMENT INCOME TAX COLLECTIONS IN METROPOLITAN MANILA Revenue from Income Tax Collection Own Sources Ratio of Revenue Percent Population Income Tax Per Capita in from Own Sources FY 1971 of National 1970 Collected 1970 to Income Tax (P 000,000) Total (0 0 0 000) Per Capita () (P) Collection () (2) (3) () (5) (6) Manila City 322.692 26.4 1.331 242.4 80.17 33.1 Quezon City 27.236 2.2 .754 36.1 48.14 133.4 Pasay City 7.754 0.6 .206 37.6 41.70 110.9 Caloocan City 6.227 0.5 .274 22.7 30.23 133.2 Cavite City .645 0.1 .076 8.5 14.57 171.4 a Rizal Province 461.112 38.0 1.611 286.23 21.69 7.6 Laguna Province 4.963 0.4 .700 7.1 8.76 123.4 Bulacan Province 13.505 1.1 .836 16.e 11.65 71.9 Cavite Province 3.606 0.3 .kh 8.1 eo.56 253.8 TOTAL 847.740 69.6 6.032 140.5 37.26 26.5 Sources: National Tax Research Ccnter, 1970 Population Census. - 47 - capacity in different localities. The income tax liability amount and local government revenues collected from own sources are compared in column (6) of Table 18. These results show a wide variation among the cities and provinces served, with Manila and Rizal Province in particular showing small ratios of own revenues to "personal and corporate income tax liability." It must be emphasized that there are a number of possible interpretations of these data: first, they may indeed represent inter- jurisdiction variations in tax effort with lower ratios indicating lower tax effort; second, the much higher estimated capacity for Manila City and Rizal Province may be explained by the location of large head offices, rather than the existence of larger tax-paying capacity. Thus, the data are too imperfect to provide much information on the question of tax effort in the MMA. Local Government Tax Reform The property tax, because of its importance as a government resource in Metropolitan Manila, presents what may be the most serious set of local financ'e problems. Both the elasticity and the equity of the tax suffer from assessment biases, there are substantial inter- jurisdictional disparities in amounts raised, and the administration of the tax is poor with only about half of the levy actually collected. A sweeping reform of property taxation in Metropolitan Manila is a high priority item in local fiscal reform. Since P.D.76 does not affect the basically weak property tax administration, it does little to guarantee a lasting improvement in property tax collections. In light of this it is encouraging that a proposed Code for Real Property Tax Administration may soon be the basis for a Presidential decree. This proposed code includes the following provisions: (1) There shall be created a division in the Department of Finance which shall discharge all powers, duties, and functions that mey be deemed necessary in, or are pertinent to, the administration of the real property tax and the implementation of the provisions of the Code. (2) Ten million pesos is to be appropriate by the national government for a revolving fund to be used to help finance the reassessments which must take place every five years. (3) Each provincial and municipal board or city council shall set aside yearly an amount of not less than F50,000 from the real property tax collections and in the case of municipalities, 5 percent of their yearly income therefrom, for their share in the general assessment revision 3/ expenses. (4) In cases of an increase in appropriations for the different offices of the local government unit, priority shall be given to the 4/ Assessment Offices. If implemented effectively, these measures provide the basis for a considerable improvement in the state of property taxation in the Philippines. Nevertheless, there exists reasons for reservations concerning parts of the proposed code, including provisions for idle land taxes and for limiting penalties on delinquent taxes. Before an idle land tax can be effectively used, resources have to be concentrated to make the basic property tax more effective, and the penalty limited to 24 percent of delinquent taxes seems unnecessarily restrictive if incentives for prompt payment are to be adequate. 1/ Section 4. 2/ Section 26. / Section 28. / Section 33. 4 9 - Local governments in the MMA also could more intensively utilize non-property taxes which are legally available to them. One such possibility is to levy a special assessment on property as a charge for betterment. Such a tax has not only substantial revenue potential, but it may be equitable since it may be treated as a charge for benefits received. The use of such levies has been effective, for example, in the cities of Korea, Colombia, and Taiwan. While the special assessment could be a lucrative source of revenue in the MMA, in factitwas used by only three local governments between 1960 and 1970, and only insignificant income was realized. The proposed Code does include a section providing for more effective use 2/ of special assessments. Since public improvements affecting property values are more common in urban than in rural areas, end the effect of the improvements on property valve is more easily ascertained, it seems likely that special assessments can initially be used most effectively in cities and municipalities which are relatively built-up, as in Metropolitan Manila. However, given the limited administrative resources available in the property tax area, special assessments should initially be used very selectively. Finally, the per capita level of the license revenue and user charges also varies widely within the Metropolitan Manila Area. Again, the disparities are mainly due to differences in population characteristics and economic activities in the jurisdictions but also to different rate and charge structures. With respect to the latter, the efficiency losses which result from the distortion in relative prices might be viewed as another "cost" of local government fragmentation. 1/ For a more complete discussion see Orville Grimes, "Urban Land and Public Policy: Social Appropriation of Betterment," IBRD Working Paper 197h. 2/ The UNDP planning study, has argued that "the feasibility of making it mandatory for local units to levy special assessments in specified projects ... should be looked into." See MBMRSP and NTRC, "Revenue Structure of Metro Manila" Working Paper No.7. VII. INTERGOVERNMENTAL FISCAL RELATIONS Shared Taxes The internal revenue allotment from the national government was the second largest item in the tctal revenue of Metropolitan Manila in 1970, after the real property tax. At P79 million, it accounted fcr28 percent of the total revenue of MMA as compared to only 12 percent of total revenue in 1960. Over this period it grew at an average annual rate of 23 percent (see Table 9). In the case of the municipalities in MMA, their total allotments (P23 million) represented 36 percent of theLr total revenue in 1970 and exceeded their revenue from the real property tax (P17 million). Nationi taxes that were shared with local governments until recently included two groups: those subject to regular allotment, i.e., the sales tax, specific tax, contractor's tax, tax on banks and finance companies, fixed taxes on business and occupation, tax on common carriers, charges on forest products, amusement taxes, tax on insurance premiums, catererts tax, miller's tax (except that on sugar), percentage tax on cinematographic film owners, lessors, and distribut6rs, certain mining taxes (occupation fee and rentals) and water rentals; and those subject to special allotment, i.e., income taxes, inheritance and gift taxes, resiaence taxes, certain mining taxes, franchise tax, tax on agricultural products and fees for sealing of weights and measures. According to C.A. 586, R.A. 781, and R.A. 51855 17 percent of national internal revenue collections from taxes subject to regular allotment, as specified in the National Internal Revenue Code, were to be distributed to local governments, with 76 percent of this going to provinces and cities and 24 percent to municipalities. The basis of the allotment has been the preceding year's collections and within each local government category, 70 percent was distributed on the basis of population and 30 percent on the basis of land area. As for the taxes subject to special allotment, different percentages were allocated to the different local government levels depending on the tax; and some of the taxes were distributed according to population (e.g., income, estate, gift, residence) and others according to the place where they were collected (e.g., excess income tax, withholding tax, franchise tax). Income and transfer taxes accounted for the bulk of the internal revenue allotment in Metropolitan Manila in 1970. The distribution of the total intenaL revenue allotment in 1960 and 197U-is given below in Table 19. As can be seen, a major change in the distribution of the internal revenue allotment occurred between 1960 and 1970. Table 19: DISTRIBUTION OF INTERNAL REVENUE ALLOTMENTS, 1960 AND 1970 Amount (P 000,000) Percent of Total Total 79.4 100 1970: Regular allotment 9.5 12 Income and Transfer taxes 64.7 82 Residence tax 0.6 1 Franchise tax 4.4 5 Total 9.8 100 1960: Regular allotment 5.6 57 Income and Transfer taxes 0.7 13 Residence tax 0.6 5 Franchise tax 2.3 23 Source: Data provided by Philippine Governent officials. -52 - The excess income tax which was introduced after 1960 radically changed the level and nature of the internal revenue allotment of Metropolitan Manila. By 1965, Metropolitan Manila was receiving 70 percent of its internal revenue allotment, or P36.9 million per annum, from income and transfer taxes. Beginning with FY 1974, P.D. 144 (March 1973) was to be implemented. Under this decree, all taxes previously under regular and special allotment are consolidated into one fund (excluded are national internal revenue taxes accruing to special funds and special accounts in the general fund), of which 20 percent is to be distributed to local governments, with 30 percent of this going to provinces, 45 percent to municipalities and 25 percent to cities. The basis of the allotment is to be those taxes collected during the third fiscal year prior to the current fiscal year and within each local government category, 70 percent is to be distributed on the basis of population, 20 percent on the basis of land area and 10 percent equally among municipalities, cities and provinces. For the first three fiscal years of implementation,of P.D.144, the annual allotment of any local government cannot increase by more than 15 percent nor decrease by more than 50 percent. One feature o-P this new allotment system which warrants periodic review is the division of total allotments among provinces, cities, and municipalities. The relative importance of the different levels of government Pi3i,110 u11-e in the Til 111'ifinn mrly rh:ttirn erilotively r1hily. Certiinly cities have becane much more important over the past two decades. P.D. 1h simplifies the internal revenue allotment procedure, thereby increasing the chances for administrative efficiency. In addition, it makes the national allotment more equitable by abolishing the excess incane tax special allotment. The previous allotment scheme for the excess income tax had made those in the affluent local units, including Metropolitan Manila, richer, thereby substantially widening the gap between the rich and the poor local governments nationally. For example, in FY 1970, 47 percent of the P69 million that accrued to 60 chartered cities as allotment fromthe excess income tax went to Manila, 60 percent of the P132 million that accrued to all provinces went to Rizal, and 10 percent of the P61 million that accrued to 1,429 municipalities went to Makati. The total excess income tax allotment of P58 million to cities and municipalities in the MMA accounted for 73 percent of the total internal revenue allotment to the MMA in 1970. The especially rapid increase in national allotment over the period 1960-1965 in the MMA, i.e., an average annual growth rate of 40 percent, is due to the excess income tax. R.A. 2343, enacted in June 1959, allotted 30 percent of any collection of income tax over and above 1959 to the cities and provinces and municipalities in which they Wee collected. R.A. 6110 of 1969 amended the prior law by changing the base year to the tenth year immediately preceding the year in which income tax was collected. Under the new national allotment scheme of P.D.144, Metropolitan Manila will suffer considerably (see Table 20). According to projections br the National Tax Research Center, several local governments in the MMA will undergo the maximum decrease of 50 percent in national allotment allowable under the decree. Only Malabon and Taguig will get more under the new allocation scheme than they would have got under the old scheme. Manila City will suffer the greatest loss in absolute terms, P26 million. In absolute terms, MMA will lose P63 million, and in percentage terms, MMA will lose 42 percent of what it would have received under the old allocation system. One problematic provision in P.D.1l6 is the basing of the allotment on the national internal revenue taxes collected during the third fiscal year preceding the year of the allotment release. This is a long lag, and in effect does not allow the local government to benefit immediately Table 20: COMPARATTVE PROJECTD ALLOTM7ENTS OF CITIES AND MUNICIPALITIES IN MMA FOR FY 1974 (P 000's) Projected Allotment 2/ Based on Based on Percentage - Area Old System New §ystem Change MMA 149,357 86,376 - 42 Cities Wani la 52,897 26,448 - 50 Quezon 9,540 7,905 - 17 Caloocan 5,481 3,573 - 35 Pasay 2,549 2,118 - 17 Cavite 1,050 833 - 21 Municipalities Rizal Angono 163 8 - 50 Antipolo 486 275 - 43 Binangonan 44? 220 - 50 caenta 991 495 - 50 Las Pinas 1,177 589 - 50 Makati 31,574 20,808 - 34 Malabon 1,016 1,169 + 15 Mandaluyong 4,080 2,040 - 50 Marikina 1,674 938 - 44 Montalban 593 296 - 50 Muntinlupa 2,882 1,454 - 50 Navotas 539 331 - 39 Paranague 4,882 2,506 - 49 Pasig 14,829 7,415 - 50 Pateros 193 166 - 14 San Juan 4,135 2,068 - 50 San Mateo 199 130 - 35 Taguig 333 383 + 15 Taytay 468 234 - 50 Laguna Bnan 406 240 -41 Cabuyao 160 144 - 10 Calamba 637 345 - 46 San Pedro 253 141 --44 Sta. Rosa 233 174 - 25 Table continues on the following page. Table 20: Continued Projected Allotment -aseT on Based on Percentage Area Old System New System Change Cavite 9acoor 257 200 - 22 Carmona 157 93 - 41 6mus 677 338 - 50 Kawit 340 170 - 50 Noveleta 263 132 - 50 Rosario 195 103 - 47 Balacan MRrilao 420 210 - 50 Meycauayan 46 232 - 50 Obando 21c 122 - 43 San Jose 211 109 - 48 Valenzuela 2,296 1,148 - 50 1/ 40 local governments, as defined by National Tax Research Center and Manila Bay Metropolitan Region Strategic Plan. 2/ P.D. #lh limits the decrease to 50% and the increase to 15% for any local government from FY 74-76. Source: Data provided by Philippine Goverment officials. -56- from the growth in na-ional taxes. In the past, steps have been taken to avoid the crippling effects of delayed allotment release on local government operations. The Decentralization Act of 1967 (R.A.5185) introduced the automatic retention scheme. This authorized that predetermined shares of regular allotment (which were based on collections during the preceding fiscal year) from the national internal revenue taxes paid within their jurisdiction, be turned over to local governments every month. R.A.6258 extended application of the automatic retention scheme to the special internal revenue allotments, including income tax collections. The use of the third fiscal year preceding the year of the allotment release as the basis for allotment seems to be a big step backward in light of these two acts. PJD.144 also creates a new special fund, the local government fund, to consist of 5 percent of national internal revenue collections not otherwise accruing to the other special funds or special accounts in the general fund. This local government fund will be managed by the President and used to aid local governments or projects. Thus past national allotment systems made the dimtribution of revenue among local governments in the MMA less equal . While P.D.1hLi will correct the inequities of the excess income tax allotment, its allot- ment formula includes no specifically redistributive elements. So far the national allotment system has failed to provide any incentive to local governments to improve their tax efforts. Unfortunately, the allotment system in P.D.144 does not provide any incentive either. Grants-in-Aid Grants-in-aid are made by the national government to local governments for specific purposes, but are of considerably less -57- importance to local governments than the internal revenue allotment. For the MMA, grants-in-aid consisted of only 2 percent of total revenues, compared to 28 percent for the internal revenue allotment in 1970 (see Table 8). During the 1960-1970 period, grants-in-aid to the MMA grew at an average annual rate of 7.9 percent (see Table 9). In 1970 the five cities in the MMA received F3.6 million in grants-in-aid, while the municipalities received P1.3 million. Grants-in-aid comprise grants from special accounts in the general fund and from special funds of the national government. In some cases, counterpart funds are a prerequisite for acquiring grants. These special funds for grants to cities, mnicipalities, and provinces include: Contingency fund ) managed by the Office of the President Calamity fund ) Highway Special Fund Philippine Charity Sweepstakes, Horseraces and Lotteries Fund Local Government Fund (created by P.D.1ah, March 1973) Administration of the Highway Special Fund is governed by R.A. 917 and P.D.17. Apportionment of the fund is as follows: 82 percent for apportionment to provinces, municipalities and cities for maintenance, improvement, construction and reconstruction of roads. 6 percent administrative expenses 2 percent preliminary engineering 5 percent contingent emergency funds 5 percent discretionary fund Funds for the maintenance of city and provincial roads and bridges are released only if an annual maintenance program for the network of roads under their jurisdiction has been subnitted and only when a counterpart fund is put up. Local governments use part of the Road and Bridge Fund for this. -58- For certain projects, release of funds from the Philippine Charity Sweepstakes, Horseraces and Lotteries Fund also requires matching funds. An example of a special account in the general fund is that for financing public works projects, created in March 1973 by P.D.163. The source of revenue for this special account is 30 percent of the withholding tax collections from non-resident foreign corporations and non-resident citizens. At present, there is no uniform procedure for earmarking proceeds from national taxes for special funds or special accounts in the eeneral fund. Loans Borrowing from the national government and other financial institutions accounts for a very small part of total revenue in NMA. In 1970, total borrowing of the NMA was only P1.2 million, which was 0.7 percent of MMA's total revenue. Total loans outstanding as of June 30, 1970, in the five cities of MMA amounted to about P29 million; Manila City accounted for over 70 percent of this. Of the loans outstanding for the five cities, about P13 million were from Government Service Insurance System (Social Security), P12 million from the Central Bank, P500,000 from the Development Bank of the Philippines (DBP), and P1 million from other term obligations. Also included in this category are P2.5 million from bonds sold in the private sector. Total loans outstanding as of June 30, 1970, in the municipalities amounted to about P650,000. Of these, 40 percent were municipal deposits which are not even national funds, but rather surplus funds of municipalities deposited with the Provincial Treasury. Of the remainder, P150,000 were from the Development Bank of the Philippines, P80,000 from GSIS, P120,000 from the Loan Fund, P10,000 from the National Market Fund, and P30,000 under other term obligations. 1/ National Tax Research Center, "Revenue Structure of Metro Manila", Working Paper No.?. -59- Under R.A.265, the Central Bank may make provisional cash advances to local governments to cover budgetary deficits. These advances may not exceed 15 percent of the average annual income of the local government over the last three preceding fiscal years, are payable on or before September 30 of the ensuing fiscal year,and carry a h½ percent interest charge. Long-term loans can be secured from DBP and GSIS at interest rates of between 6 and 9 percent per annum. There are a series of laws which authorize local governments to borrowfrom the national government and from the private sector for various purposes, especially self- liquidating projects. Among them, R.A. 267 and 498 empower local governments to borrowat an interest rate of not more than 8 percent for the purpose of purchasing or expropriating homesites within their territorial jurisdiction for sub-division and resale at cost to residents. P.D.127 allows local governments to invest in bonds for educational purposes. Applications for loans with lending institutions such as the GSIS, DBP, and PNB are usually sent to the Secretary of Finance for his recommendation. The legal borrowing capacity of a local government is 7 percent of the total assessed valuation of property minus its outstanding loan obligations. Net paying capacity is also considered. While relatively insignificant in the MMA, inter-local fiscal relations do exist. Only five municipalities received aid from a province or municipality in FY 1970. Municipal funds held in reserve by the provincial treasurer may be lent to municipalities for public works projects and for schools (construction and land purchase). Provinces also are authorized to lend to their municipalities, barrios, etc., for various purposes. Municipalities may grant funds for the use of provincial charitable institutions. -60- VIII. METROPOLITAN FISCAL PROBLEMS AND METROPOLITAN GOVERNANCE The foregoing discussion of local government structure and finance in the Philippines and its effect on the MMA reveals a number of problems. Two major causes of these problems are inadequate amounts of public sector resources available to local governments, and the fragmentation of local government within the Metropolitan Area. The resource bottle -neck is common to all governments trying to provide an adequate level of services. One element of the resource constraint is the level of total personal income in Manila and in the Philippines which is not adequate to support a high level of public sector resource mobilization. The other dimension is that government may not mobilize a high-enough proportion of personal income for the public sector. The second problem, the fragmented structure of local government in Metropolitan Manila, has resulted in substantial intra-metropolitan - - even intra-neighborhood -- public service level disparities and an almost complete disregard for any kind of long term physical or fiscal planning. Some of the city and manicipal governments within Manila have attempted to take on a planning function, but these have been largely uncoordinated and plans have not been executed. Some local units have defined zoning ordinances, but again these have not been enforced, with spot variances common and no overall coordination. As a result, the urban area has grown in an ad hoc manner, guided principally by market forces in the private sector and influenced somewhat by inter-jurisdictional competition for industry. Efficient organization of urban activities by such a process could only be by accident. An additional element of the government fragment- ation problem is that it appears to give rise to wide variations amonE -61- camaunities in the level of public services provided. Recent Reforms Local government structure and finance are currently undergoing change throughout the Philippines. Three recent Presidential decrees, P.D.76 on the real property tax, P.D.144 on the system of national internal revenue allotments to local governments, and a new local tax code, P.D.231, will substantially affect the revenue of the local governments in Metropolitan Manila. The new national internal revenue allotment scheme went into effect on July 1, 1973, and the changes in the property tax base and the distribution of property tax revenue went into effect in 1974. Two other Presidential decrees, a new real property tax administration code and a new local government code will also alter the present structure. In addition, the creation of some new central authority is anticipated for the Metropolitan Manila Area, though it is not yet clear how powerful this new authority will be. The Local Tax Code enacted under P.D.231 (June 28, 1973) puts into a single repository the provisions relating to the taxing and revenue raising powers of local governments. The code transfers some national taxes to provinces and cities, and specifies the extent and limitations on taxing power of each level of government. It also empowers the Secretary of Finance to review tax revenue ordinances and to alter the existing rates every two years. The new local tax code extends taxing powers to the provinces for the first time. Most of these powers involve transfers of taxing power from the national to the provincial level, e.g. (1) residence tax (2) occupation tax (3) amusement tax on admissions, and (4) fees for sealing, licensing of weights and measures, peddlar's tax, and rental fee for use of municipal waters, rivers, etc. -62- Other authorized taxes for provincial governments include: tax on transfer of real property, tax on printing and publishing businesses, franchise tax, and sand and gravel fee. Provincial revenue sources are further increased because of the provision which grants all levels of local government the authority to collect market and slaughterhouse fees, tuition fees, permit fees, tolls, and public utility and service charges. The cities' taxing powers are also increased by P.D.231, as they have the authority to levy the same taxes and fees as the provinces (but usually at rates which may be higher) in addition to those taxes, licenses, fees, and user charges that they already levied. The barrios lost their power to levy an additional property tax, a provision which has had little effect since very few barrios utilized this power. The code sets fixed rates for the taxes transferred from the national government. For other taxes, maximum rates are specified. As previously noted, the maximum rate for cities exceeds that for municipalities and provinces by 50 percent in some cases. At least once every two years, the Secretary of Finance is to consider the necessity for changing the level of the maximum rates. At first glance, it would seem that the local Tax Code will have two effects. First, it will probably strengthen the overall financial powers of the local governments in the MMA and may therefore lead to an increase in revenues raised. Whether such an increase actually comes about depends on the extent to which local governments use this increased taxing power -- sanething that they have not chosen to do intensively in the past. However, given the expected decrease in internal revenue allotments in the MMA resulting from P.D.144, new or past local revenue sources will have to be more fully utilized merely to maintain existing levels of local government expenditures. -63- The second result of the Local Tax Code would seem less favorable. By strengthening the tax powers and fiscal independence of governments (particularly provinces) in the MMA, the Local Tax Code strengthens the results of fragmentation of local government, i.e, uncoordinated fiscal and physical planning decisions, service level and tax burden disparities, etc. Impending Reforms The proposed real property tax administration code has previously been discussed, so this section is devoted to the proposed local government code, for which drafts are being prepared and discussed. The major policy objective according to the Constitution seems to be devolution of some of the authority of the national government by promoting the autonomy of local governments strengthened with more powers and resources. The code will cover the details of legal and administrative aspects related to each level of local government, namely, provincial, municipal, city and barrio. It will also contain a section on inter-governmental relations. Since it is bound to affect considerably the powers of the constituent local governments of the proposed Metropolitan Manila Authority, the proposal of formation of the Metropolitan Manila Authority should be considered in conjunction with the new local government code. Ideally, all interrelated reforms affecting structurese and powers of local governments, such as the Local Tax Code, Local Government Code and the metropolitan governments should be viewed together and not in isolation. The Local Tax Code has already transferred certain tax and revenue raising powers to provinces and cities. If a centralized form of local government in Metropolitan Manila is considered desirable for raising service levels in general and removing interjurisdictional variations in amenity levels in particular, it might be appropriate to make the decision on the form and powers of the metropolitan government before its constituent local governments are granted more autonamous positions within the overall government organization. -64- Metropolitan Government A Presidential decree creating a new central authority for Metropolitan Manila as well as a new planning commission for a larger metropolitan region are anticipated soon. Thus far, three alternatives have been proposed for a Metropolitan Manila authority. There is general agreement that more centralization of the administration of functions within Metropolitan Manila is needed, that a two-tier form of government is desirable, and that the central agency should have its own financial resources. Agreement has not been reached however, on the degree of functional responsibility and extent of financial resources that this central agency will have, though the trend seems to be toward a strong central authority with control over several functions and substantial financial resources. Proposed Reforms. The three proposals so far offered include: (1) the Metropolitan Mayors Coordinating Council (MMCC) proposal, (2) a plan developed by a committee chaired by Dean Ramos of the University of the Philippines, and (3) a draft plan prepared for the National Economic and Development Authority (NEDA). Under the first, the metropolitan government would be essentially a coordinating council with little or no direct expenditure or revenue powers; under this arrangement the MMCC would appoint the head and would serve as a legislative body. All local government revenue powers would remain intact at the existing city, municipal and provincial levels. The Ramos proposal differs very little in substance from the mayors' proposal. Under it, the metropolitan government would be primarily a coordinating unit with little expenditure orievenue decision-making power. The basic differences between the two proposals are that under the Ramos version: (a) the metropolitan government would have some additional -65- expenditure responsibility, in the area of waste disposal and fire services and (b) the metropolitan government would be directly responsible to the Office of the President and only advised by the Mayors' Council. Under both these alternatives, major fiscal power would still lie with the provinces, cities and municipalities. Though the financing issues are not faced in detail in either proposal, it seems that neither creates a strong area-wide financing unit; i.e. major local government financial responsibility would remain with the existing structure of 16 local governments chosen to define Metropolitan Manila in these two proposals. A strong area-wide financing unit would be created under the third (NEDA) proposal, according to which the major local government expenditure responsibilities and revenue powers would rest with the Metropolitan Manila Authority (hereafter sametimes referred to as "the Authority"), some expenditure responsibility would be shared between the Authority and the existing city and municipal governments, and some expenditure decisions (e.g. those related to enforcement and regulation and to some neighborhood functions) and perhaps even minor revenue powers would rest exclusively with the existing cities and municipal governments. However, the budget of the Authority would be substantially greater than that of all lower tier governments combined. This option is given the most attention here, because it appears to hold the greatest possibilities for delivering and financing services on an areawide basis.Moreover, it is the only one of the three proposals which would substantially reduce the fragmentation of local government and the pattern of disparities which result. 1/ That is, these two proposals utilize a concept of the Metropolitan Area which embraces only 4 cities plus 10 municipalities in 2 provinces. -66- The Metropolitan Manila Authority would operate essentially as a federal city. In form and function it would not be unlike many large cities in the developing world, e.g., the Jakarta District Government, Seoul Special City, the Bogota District Governmefit. As presently envisioned, the policies and programs of the Authority would be directly controlled from the Office of the President, and its chief administrative officer would be appointed by the President. There would be no elected council or assembly, and legal, fiscal, and executing authority as well as regular operating policies would originate at the Presidential level. Its budget would require approval at the central government level. The specifies of the internal organization are not presented. One possibility suggested, however, is for a Metropolitan Manager assisted by two Deputy Managers - one for planning and one for operations - and advised both by NEDA and by the Metropolitan Mayors' Council. The expenditure responsibility of the Manila Metropolitan Authority would be relatively broad, and would involve both the taking over of some functions which are now delivered at the city, municipal, provincial and barrio level as well as the assumption of some functions presently financed and administered at the national level. The Authority's functional responsibilities would cover the general housekeeping and protective functions, social services, and infrastructure development. The functions tentatively proposed for the Authority are: - police - fire - flood control and drainage - garbage collection - water supply and sewerage - land management and zoning - transportation -- including traffic regulations and control, road and bridge construction and maintenance for all but national highways and bridges. 1/ Composed of the elected mayors of the 5 charter cities and 33 municipalities which are considered part of the metropolitan area in this proposal. - health clinics and hospitals -- city and national institutions would remain as at present. - park and recreational development - shared responsibility. - intermediate level education (grades 5-7). It is anticipated that the Authority is to take over these functions by phases, generally in the sequence indicated in the above list. In some cases, these functions would be completely metropolitan (e.g. water supply and sewerage) and in others they would be shared (e.g. most health clinics and hospitals would be metropolitan, but some local facilities would remain.) However, no major function would be completely a local function so that the.ratio of aggregate local government to metropolitan government expenditures would be low. The exact distribution of expenditure responsibility remains to be decided but in any case the Authority's budget would certainly be greater than the total of all expenditures of all local government presently existing i4thin the metropolitan area. The revenues of the Manila Metropolitan Authority would come from five major sources: the property tax, user charges, licenses and fees, borrowing, and central government assistance. The latter would include both the local share allotment and a general assistance grant. Possible additional revenue sources for the Authority would include an idle land tax, transfer tax, amusement taxes, and transfer of residence tax. The power to adjust the legal structure of taxes and charges and the determination of borrowing ceilings, however, would rest with the national government. The second, lower tier of Manila's metropolitan government structure would consist of the existing chartered cities and the municipalities. These local units would retain their present political structures but their powers and duties would be substantially reduced. On the expenditure side, they would be involved primarily with minor code enforcement, (e.g., housing, sanitary inspections) and with the continued operation of their existing enterprises -68- (e.g. markets). They would also have responsibility for functions such as street cleaning, refuse collection, and services for the indigent. These local units would have no taxing powers, and would derive revenues from specified licenses and charges, and/or from an allocation from the Manila Metropolitan Authority. The budgets of the local units would be subject to control by the Authority. It is in the area of local tier revenue powers that there seems to be most room for a variant of this metropolitan government plan. The local governments might be given some taxing powers and commensurate discretion over expenditures. One plan would allow the local government and the metropolitan government to share equally in the propexty tax. Such plans which do not divorce local revenues receivei from local wealth or taxable capacity do not resolve the problem of inter-jurisdictional variations in public service levels, but they do provide a clearer link between tax payments and expenditure benefits. Evaluation. There are many advantages to a metropolitan government form. The most important are usually thought to be efficiency and equity in the operation of the local public sector. The efficiency argument is particularly difficult to document since quantification depends on finding some suitabl measure of public sector output. Intuitively, it seems reasonable that one well-staffed police training academy, for example, can perform its function more efficiently than can four small academies, or that one fire department can provide a better level of service than can 27 fire departments. Certainly there will be positive efficiency effects associated with the 1/ The Mayors' proposal and the Ramos proposal for government reform would do little to equalize public service levels. In terms of efficiency, the effects would depend on the Authority and what it would be able to achieve in the absence of strong taxing and spending powers. -6?~- ability to plan and implement public sector activities on an areawide basis rather than on a fragmented local government basis. However, it should be underscored that these positive efficiency effects need not mean reduced government costs since wage rates of public employees in low paying communities waild likely rise toward levels existing in higher paying communities. This upward movement in costs would at least partially offset eeonomies and benefits resulting from coordination, the conduct of activities on a larger scale, and the internalization of certain externalities. The second major kind of potential benefit of the formation of metropolitan government is its equity effect. Presently, local governments within Metropolitan Manila may offer different levels of public services because of their different levels of wealth and differential ability to tax. These disparities among local governments in Xetropolitan Manila are documented above. Under the Metropolitan Manila Authority the power to tax would be removed from these local units, hence there would be no automatic disparity due to inter-jurisdictional differences in the level of fiscal capacity. Accordingly, it would be possible for the Authority to move toward equalizing the level of services provided throughout the metropolitan area. Whether or not such equalization would in fact come about would be a national government decision, executed through the Authority's manager. If service level equalization were a goal of the Authority, it would, as previously noted, be almost certain that the Authority's total costs would be higher than the present cost of providing the same total quantity of services. The average wage level of local public employees would rise. Furthermore, a tendency would exist to equalize service levels toward the higher levels, and this too would increase total local government expenditures at the same time that additional efficiencies were being realized. -70- In addition to this consolidation of what are no w local government services, the Authority would assume additional functions which had been provided at the national level -- water supply, sewerage, drainage and flood control and perhaps some levels of education. The transfer of these functions to the Authority need not be accompanied by cost increases, except possibly Zor education where intra-metropolitan service level disparities do arise because of local government taxation for school purposes (i.e., the receipts to the Special Education Fund). In any case, the budget of the Manila Metropolitan Authority would be substantial. However, it would seem that under present plans, the amount of resources available to meet the expenditures of the Authority would not be adequate. Though exact expenditure projections are not available, it is possible to speculate on the general magnitude of financing requirements, particularly with respect to that portion which would have to be borne from the general revenues of the Authority. Of the functions suggested to be designated for Authority financing, those susceptible to user charge financing are water supply, sewerage, and refuse collection. In practice, the cost of none of these functions is now fully covered by charges. Therefore, a general fund subsidy would have to be created. For certain functions there are earmarked taxes; a 1O.25 tax on movie admissions - rather oddly designated for flood control purposes -- and propul'ty tax suitlal'goi for 1lood contol aid eduuaLlou. hVttli TL th-e earmarked taxes were to be transferred to the Mani3a Metropolitan Authority, substantial amounts of general revenue would be necessary to cover the full cost of education and flood control. The other functions which would be transferred to the metropolitan government are essentially those which must be financed entirely from general -71- account revenues. These include health and hospitals, road and bridge construction and maintenance, and police and fire protection. The principal sources of general revenue available to cover these costs are local property taxes and local share allotment from the national government. It has been argued that receipts from the local property tax will increase drastically because of the new decrees which: (a) require self-assessment of the market value of land, and (b) fix this self-assessed value as the expropriation price by government. A doubling of receipts is expected in some cities in Metropolitan Manila. But even if some cities do experience such an increase in property tax revenues, it would appear that the magnitude of the increase will not nearly match the increase in general revenue needs of the proposed Manila Metropolitan Authority. The second major general revenue source available to the Authority would be the local share allotment from the national government. By a recent Presidential decree, the distribution formula has been changed with the result that Metropolitan Manila will now receive a smaller share of the total allocation.- Since the projected increase in total allocation is not enough to offset this reduced share, the effect on Metropolitan Manila governments will be an actual reduction in the total amount received. Hence, the increased property tax revenue performance will be offset to some actent by the decline in revenue from this allocation. J/ At the same time, this readjustment will alter the shares of the various cities and municipalities within the Manila Metropolitan area; though not apparently in a way that will improve equity. There is no clear relationship between the projected decline in the local share allotment and the wealth or poverty of municipalities; however, it does appear that such relationship as does exist is perverse; for example, Makati (which is certainly the wealthiest municipality in the Metropolitan Area) is projected to have one of the lowest percentage decreases; that of Quezon City is even lower. On the other hand, Manila City which has some of the greatest needs, is projected to have the maximum degree of decrease. -72- It seems clear that if, as is desirable, the Manila Metropolitan Authority is established, additional sources of income will have to be found to accomodate the fiscal needs of the metropolitan government. There are a number of alternative means of filling this financing gap. First, the Authority might resort to increased borrowing for capital projects, but ultimately the debt must be serviced either through increased general taxes or increased user charges. Second, the national government might (and probably would) raise the number and amount of categorical grants to support certain activities. Third, the Authority could engage more lb avily in "self-financing" projects, e.g., the tapping of land value increments to at least cover the cost-related development aspects. Fourth, user charges might be given more consideration as a revenue source. Fifth, there might be room to increase the level of real property taxation - a rate between 1.5 and 2.0 percent of full market value might be considered; with the current assessment rates for residential property this would mean a noninal rate of 4.5-6.0 percent, or roughly twice existing nominal rates. A differential rate on idle land might also be considered as property tax administration improves. Sixth, some national taxes might be transferred, e.g. the contractor's tax. A means of easing the initial burden placed on the Manila Metropolitan Authority is to limit its responsibilities. As previously indicated, some gradual assumption of the responsibility for various functions seems likely as well as appropriate. Improvements in the design and administration of revenue sources could accompany the growth in expenditure responsibilities. Early emphasis on improvements in property taxation and in business and occupation taxes would be desirable. These two revenue sources, having contributed significantly to local tax competition in the past, could be levied -73- uniformly in the metropolitan area with revenues distributed between the Authority and the local tier governments as is deemed appropriate. If the initial range of functions of the Authority is to be limited it would seem appropriate that early fields of activity include land-use planning, transport management, and water management (including water supply, sewage disposal, and drainage and flood control). Efforts in these areas tie in with the need for improved property taxation and increased use of special assessments as a revenue source. Expenditure responsibilities for "people services" such as health and education could continue to rest in the hands of the national and local tier governments while it is determined what other functions could usefully be assumed by the Authority. Although these impressions of metropolitan reform and its inplications are general and not empirically supported, they reflect the opinion that the particulars of financing a Manila Metropolitan government remain to be worked out and that, in doing so, it will be necessary to define sources of revenue in addition to those existing under the present structure of local government finance. This is not to say that the metropolitan government form is not desirable. On the contrary, it would seem the only clear approach to raising service levels in generals and to removing the Intpr-iursdicti-onal varlitions in amenity and tax burden levels which presently exist within Metropolitan Manila.