Saturday, May 30, 2009

Decentralization 4: Local Taxes and Provincial Airports

Posting here two related articles...

(1) Local Taxes and Decentralization

The Congressional Planning and Budget Department (CPBD), the economic think tank of the Philippines’ House of Representatives, recently produced a paper entitled “Public Sector Government and Decentralization in the Philippines”, authored by the office Executive Director, Dr. Romulo “Jun” Miral, Jr. CBPD was my former office for 9 years in the last decade, and Jun is my friend.

The paper was reported in at least one newspaper, “House think-tank pushes stronger taxing powers for local governments” by Iris Gonzales, May 10, 2009.

Jun argued that local governments must be given stronger taxing powers or at least commensurate to the expenditure functions assigned to them, that while major expenditure functions have been devolved to local governments, the National Government (NG) continues to have exclusive authority over productive and broad based taxes.

Jun wrote further, “Government resources continue to be centralized, resulting in common pool problems and local governments remain very dependent on National Government transfers and the direct provision of devolved services. This undermines local autonomy and government accountability.”

The NG collects huge amount of money from income tax (personal and corporate), value added tax (VAT), import tax, excise tax (alcohol, tobacco and petroleum products, the so-called “public bads”), documentary stamp tax, franchise tax, travel tax, motor vehicle tax, etc. The various NG agencies also collect their own charges and fees – passport fee, driver’s license fee, NBI fee, police clearance fee, terminal fee, irrigation fee, etc.).

Local government units (LGUs) collect mainly real property tax (RPT), community residence tax (individual and corporations), business license taxes and fees (fire department fee, health and sanitation permit fee, garbage collection fee, building and electrical permit fee, business plate fee, etc.).

If one will visit a typical business enterprise (say a restaurant or computer shop), one will notice about a dozen compliance certificates from various NG agencies and LGUs, and business plates. The business plates issued by the barangay or village, and city or municipality, would normally include the name and face of the barangay captain, and city or municipal Mayor, respectively. That will give someone who is aspiring to become a start-up entrepreneur, the maze of government bureaucracies that he/she will face every single year. Consider also the monthly, quarterly and annual taxes and fees to be paid to all of those agencies, the cost of compliance, and one can possibly be terrified and would rather decide to operate as an informal and small or micro enterprise.

Back to LGU-NG taxation. Jun is proposing that to achieve a more effective government decentralization, the NG and LGUs can do joint taxation of major taxes such as income tax. I am glad that unlike many economists in the NG and multilateral institutions like the IMF, WB and ADB, Jun did not propose further gouging the pockets of Filipino taxpayers. Instead, he proposed that “To accommodate the additional taxes to be imposed by local governments without increasing the overall burden on taxpayers, NG tax rates could be commensurately reduced.”

I would add that some NG taxes should be abolished or drastically cut. This will have two important positive impact. First, it will put the Philippines on the league of modern Asian economies who are attracting big investors and entrepreneurs via tax competition – Hong Kong, Singapore and Dubai. Malaysia and Brunei are attempting to join this league too. Second, the “savings” by individual and corporate taxpayers will allow them some breathing space to pay any additional taxes and fees to be collected by LGUs. A competition among LGUs can happen – who has the best peace and order situation, who has the cleanest streets and parks, who has the most competitive and reasonable local taxes, etc. And people and firms can “vote with their feet” by moving to LGUs that offer the most business-friendly policies and projects. And leave those cities or municipalities or provinces whose LGUs have parasitic and extortionary policies.

But this is easier said than done. Many agencies in the NG, especially the Office of the President and Congress, are experienced parasites. They will never let go of those multiple and duplicating taxes and fees that feed their entrenched bureaucracies and give them enough arbitrary powers that force entrepreneurs to kneel before them and make “amicable settlements”.

(2) Globalization and Provincial Airports

While most people have elaborate definition of globalization, I have a simple one: Globalization = Mobility. Mobility of people, capital, technology, culture, sports and music across the country and across the globe.

Such mobility of people, their goods and services across islands, countries and continents, is facilitated by various modes of transportation – land, sea and air. For long distances covering hundreds or thousands of kilometers away, air transportation is the most cost effective and time saving. For the Philippines, an archipelago and geographically detached even from its nearest neighboring country, the presence of various airlines – both domestic and international, is very crucial. By extension, the presence of various international airports is equally crucial. International airlines can only come in if there are good and reliable international airports that can handle their huge airplanes and huge volume of passengers and cargo.

For a country with more than 7,000 islands and a population of nearly 92 million (12th largest in the world), and an estimated 8 million to 9 million living abroad, there should be plenty of international airports across the country. Currently there are only nine: 4 in Luzon (NAIA, Clark, Subic and Laoag), 3 in Mindanao (Davao, Gen. Santos and Zamboanga) and 2 in the Visayas (Mactan-Cebu and Kalibo). Some of these international airports do not get frequent international flights, like the one in Kalibo.

I think more international airports should be developed out of existing domestic airports. In particular:

1. Tuguegarao airport to serve the Cagayan Valley region and neighboring provinces in the Cordillera region.

2. Legaspi or Naga airport to serve the Bicol region which has a big population too and has several island-provinces like Masbate and Catanduanes.

3. Iloilo airport to serve Panay Island’s four provinces plus the island-province of Guimaras. Kalibo airport serves mostly the tourists going to Boracay island. It’s not a big and modern airport but it has a long runway that can accommodate big airplanes, unlike the airport in Caticlan.

4. Bacolod-Silay airport to serve Negros Occidental and Negros Oriental provinces. The former is among the five biggest provinces in the country in terms of population outside of Metro Manila.

5. Tacloban airport to serve the Eastern Visayas region and its six or seven provinces.

6. Cagayan de Oro or Butuan airport to serve the Northern Mindanao and Caraga regions, including the island-province of Camiguin and Siargao island. Both islands are famous for tourism.
By saying international airports, the above-proposed airports need not serve flights going to and from the US, Europe and Australia. What is important is to accommodate flights going to and from the country’s selected Asian cities like Hong Kong, Singapore, Seoul, Tokyo, Taipei, Bangkok and Kuala Lumpur. One or two flights a week for any or all of those Asian destinations would be enough. And if one is going to several destinations in North America, Europe, Australia-NZ, South America and Africa, all those Asian cities mentioned have direct flights to the big cities of the above-mentioned continents.

Recently, the Regional Development Council of Western Visayas asked the Civil Aviation Authority of the Philippines (CAAP), formerly the Air Transportation Office (ATO), to open the Iloilo airport to international flights. The Council also told CAAP that it wants to retain at least 10% of the P200 per passenger airport terminal fee. I have been to Iloilo airport several times as my wife is from Iloilo City, and I can say that this airport is modern enough – typical glass and steel structure of modern architectures, and should be able to handle limited international flights. For now, I have several points to make.

One, if a national bureaucracy like CAAP will drag its feet for long, like in deciding whether to allow international flights at the Iloilo airport or not, then local governments will have no way of implementing their collective plan and program. This is another proof that decentralization of political and economic powers is not yet fully implemented. Certain bureaucracies in Metro Manila still decide what is good or bad for those in the provinces.

Two, CAAP gets the entire terminal fee collections of provincial airports. I did not know this before. I thought ATO, now CAAP, gets only a certain percentage from the terminal fee collections from those provincial airports. This is a huge collection, actually. Last year, toll and terminal fee collection was P215 million, and is projected to rise to P236 million.

Three, airports need not be owned and operated by governments. A consortium of private corporations including airlines should be allowed to buy and develop existing airports, or create a new one. Anyway, there are several government agencies that can regulate such privately-owned airports, including the CAAP, the provincial and city or municipal governments, and perhaps the Civil Aeronautics Board, among others.

To help encourage provincial and regional development, let the local government units compete with each other in developing and modernizing their own infrastructure facilities (roads, airports, seaports, etc.), improve the peace and order situation, and even engage in tax competition when necessary. The goal is to attract plenty of investors and visitors who will create plenty of jobs and entrepreneurial opportunities for their people.

The continuing centralization of power in the hands of certain national government agencies is a hindrance to the development of some local governments, a hindrance to faster globalization and economic integration of the people in the provinces with other cities and countries around the globe.

See also: Decentralization 3: Challenges to Local Government, November 18, 2008

No comments: