Raising local incomes: Taxes and non-tax revenues such as fees and charges paid for government services are part of the incomes of any local government apart from its share in the national revenue resources. KEITH BACONGCO/AKP Images

The Local Government Code (LGC) of 1991 paved the way for greater local autonomy in an effort to bring government closer to the doorsteps of the people. As local governments take on greater roles in the provision of public services, they require greater resources and the means to generate these. At the same time, greater decentralization brings with it the need to strengthen mechanisms for transparency and accountability in local government budgeting and spending.

Fiscal autonomy refers to the broad latitude or leeway given to local governments in accessing revenues, disbursing and utilizing funds1 and is considered as an essential component of local autonomy. Autonomy is however something entirely different from accountability. Possessing autonomy does not negate the critical need to ensure accountability and fully penalize those who fail to properly report their activities.

To give one an idea of how much financial resources are managed by local governments, Table 1 shows the combined incomes of provinces, municipalities and cities in the country as of the year 2008.

Table 1. LGU Incomes for 2008 (Figures in Pesos)

Source: Bureau of Local Government Finance, Department of Finance

The table shows that the combined incomes of all cities in 2008 reached almost PhP 115.8 billion (USD 2.57 billion) while the combined income of all provinces and municipalities amount to almost PhP 160 billion (USD 3.56 billion). As local governments receive, generate, disburse and utilize more public funds, citizens need to monitor local officials managing these funds properly and effectively and so help ensure the resources are used to provide the necessary public services in their respective localities.

This background paper seeks to provide general readers with a basic understanding of local incomes and expenditures so they will be able to play their role as civic watchdogs. It discusses three main points: how local governments generate income and where they are sourced; the local budget process to illustrate how these resources are allocated and utilized; and the ways how and where citizens can intervene and help strengthen transparency and accountability in the management of local public finances.

Local government income generation: How and where?

Income covers “all revenues and receipts collected or received, forming the gross accretion of funds of the local government;”² Local government income comes from different sources and revenue measures. Some are generated internally –in the form of local taxations while others are sourced elsewhere –from the likes of national government, from other local government units (LGUs) and from creditors. This background paper will focus on local revenue sources and the share of national wealth since they are the main income sources of most LGUs. It is however important to understand that loans/borrowings, aid and grants and inter-local authority transfers can also play a significant role.

Local sources of income

The local governments’ power to generate its own financial resources is guaranteed by Article 10 Section 5 of the Constitution:

“Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.”

Two important points can be deduced from the said provision: one, that local sources of income can be through tax and non-tax revenue measures; and, two, that collections from these sources shall go to the local government concerned.

Local governments are given the power to adopt and implement tax and non-tax measures to generate funds. Section 130 of the LGC, however, requires that these measures are consistent with the following principles:

1. Taxation shall be uniform in each local government unit;
2. Taxes, fees, charges and other impositions shall:
   1. be equitable and based as far as practicable on the taxpayer’s ability to pay;
   2. be levied and collected only for public purposes;
   3. not be unjust, excessive, oppressive, or confiscatory;
   4. not be contrary to law, public policy, national economic policy, or in restraint of trade;
3. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person;
4. The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,
5. Each local government unit shall, as far as practicable, evolve a progressive system of taxation.”

Table 2 below shows the incomes of local governments in 2008 as first presented in Table 1, but with a more detailed classification on the source of income. It shows that real property tax is a significant source of local tax revenues for provinces where it accounts for PhP 4 billion of the PhP 5.5 billion total tax revenues. While it is comparatively  less in all cities (PhP 20.9 billion out of PhP 47.1 billion), the amount is still very significant.

Table 2. Local Government Income by Source, 2008

Source: Bureau of Local Government Finance, Department of Finance

Other examples of tax revenues apart from real property tax are the tax on transfer of real property ownership; tax on business of printing and publication, franchise tax, tax on sand, gravel and other quarry resources, professional ax, amusement tax, business tax, and community tax. Table 2 shows that the cities are able to mobilize the most tax revenues, amounting to PhP 47 billion (USD 1.04 billion), most of which are from business taxes, which is not surprising since these are urban areas.

Tax measures are adopted by local governing public officials and bodies (e.g. local chief executives and sanggunian or legislative councils). This means that citizens can and should intervene and assert their participation in the formulation and deliberation of local tax policymaking.

Non-tax revenues on the other hand includes those derived from fees and charges such as fees for sealing and licensing of weights and measures, fishery rentals, and other fees collected by the local government for services rendered (e.g. payment for securing a barangay clearance). Table 2 also shows the significant contribution of non-tax revenues. Across all class of LGUs, it is however less than collections from tax revenues.

National to local transfers

Aside from the power to generate local resources, local governments are also entitled to a share in national government revenue sources. Two significant Constitutional provisions guarantee this entitlement. The first is Article X, Section 6 which provides that:

“Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.”

This provision forms the basis for the institution of the Internal Revenue Allotment (IRA), the share of local government units in the national internal revenue taxes. The national internal revenue taxes, refers to sales tax, specific tax, contractor’s tax, on banks and finance companies, fixed taxes on business and occupation, tax on common carriers, charges tax, miller’s tax (except that on sugar), percentage tax on cinematographic film owners, lessors and distributors, certain mining taxes, occupation fees and rentals, and water rentals.³

The LGC entitles local governments to 40 percent share of national internal revenue collections of the third preceding year. The LGC also specifies how the 40 percent share will be divided among local government units. It is allocated first among the LGUs as follows:

• 23 percent is allocated for provinces;
• 23 percent is allocated for cities;
• 34 percent is allocated for municipalities; and
• 20 percent is allocated for barangays

The amounts allocated for each class of LGU is further distributed to determine the share of each province, city and municipality using the following criteria:

• Population – 50 percent
• Land area – 25 percent
• Equal sharing -- 25 percent

This is why many local governments are wary of attempts to redraw municipal boundaries since it will directly affect their revenues.

From the above formula, one can infer that the following factors can affect the amount of IRA each LGU gets:

• Tax revenue performance of the national government. Effectiveness and efficiency of tax administration, tax leakages/evasion, certain tax exemptions, all impact on the actual level of internal revenue collections. Since the IRA is based on revenue collections, poor tax revenue effort will stunt the amount of the IRA for LGUs.
• LGUs with larger population size and/or land area will tend to have a greater share of the IRA.
• The greater the number of LGUs among each class will impact on the share of each LGU. If Congress converted several municipalities into cities, there would be more LGUs that will share the 23 percent allocation for cities.

It is also worth bearing in mind that the Constitution provides the mandatory and automatic release of the IRA to the LGUs. 

The second significant Constitutional provision on LGU share in national resources is Section 7 of Article IX which states that:

“Local governments shall be entitled to an equitable share in the proceeds of the utilization and development of the national wealth within their respective areas, in the manner provided by law, including sharing the same with the inhabitants by way of direct benefits.”

Section 290 of the LGC operationalized this provision stating that:

“Local government units shall, in addition to the internal revenue allotment, have a share of forty percent (40%) of the gross collection derived by the national government from the preceding fiscal year from mining taxes, royalties, forestry and fishery charges, and such other taxes, fees, or charges, including related surcharges, interests, or fines, and from its share in any co-production, joint venture or production sharing agreement in the utilization and development of the national wealth within their territorial jurisdiction.”

In addition, LGUs are also entitled a share on the proceeds derived by a government agency or government-owned or controlled corporation engaged in the utilization and development of the national wealth. The LGU’s share shall be 1 percent of the gross sales or receipts of the preceding calendar year or 40 percent of the mining taxes, royalties, forestry and fishery charges and such other taxes, fees or charges, including related surcharges, interests, or fines the government agency or GOCC would have paid if it were not otherwise exempt, whichever is higher. The allocation for such shares of the LGUs is determined as such: 20 percent for province, 45 percent for component city/municipality, and 35 percent for barangays.

Whereas the IRA is shared across all LGUs, the recipient of the shares on the earnings from utilization of the national wealth is directed to LGUs where such national wealth are located.

Table 2 shows the magnitude of shares of LGUs in internal revenue and national wealth. It shows that about PhP 72 billion (USD 1.6 billion) of IRA went to municipalities, PhP 50 billion (USD 1.1 billion) to provinces and PhP 48.7 billion (USD 1.08 billion) to cities.

Income distribution of selected LGUs

Table 2 above showed the aggregate or total incomes of all provinces, municipalities and cities broken down per income source. While it provides a general picture of the resources generated by LGUs, it is important to note that there is a great variance among individual LGUs in terms of their revenue performance. Table 3 presents the income sources for 2008 of seven selected LGUs: the provinces of Palawan, Zambales and Samar; the cities of Makati and Guihulngan, and the municipalities of Pantabangan in Nueva Ecija and Lumbaca Unayan in Lanao del Sur.

Table 3. Income Sources of Selected LGUs, 2008

Source: Bureau of Local Government Finance, Department of Finance

The table shows a big difference in terms of income generation capability of these LGUs. Among the three provinces, Palawan was able to generate as much as PhP 2.734 billion (USD 61 million) income while Samar was only able to raise PhP 655.552 million (USD 14.57 million). The two cities shows a much wider disparity with Makati generating PhP 8.47 billion (USD 188 million) and Guihulngan only yielding PhP 288.133 million (USD 6.4 million). The same is true for the two municipalities wherein Pantabangan generated income amounting to more than 20 times that of Lumbaca Unayan.

Table 4 shows the percent distribution of the incomes of the same LGUs. This presentation is useful when one is interested to know which sources of income an LGU is most dependent on. There are LGUs such as Makati City and Pantabangan which have a strong local revenue base with up to 92 percent and 76.8 percent of total incomes, respectively, are sourced local tax and non-tax revenues. In contrast, local revenues of Samar and Lumbaca Unayan are practically nil relative to its total income. These two LGUs are highly dependent on the IRA from the national government. Lumbaca Unayan is entirely dependent on IRA while Samar and Guihulngan are almost entirely dependent as well with a staggering 98.95 percent and 96.29 percent of their respective incomes coming from IRA.

Table 4. Percent Distribution in Incomes of Selected LGUs, 2008

Source: Bureau of Local Government Finance, Department of Finance

Palawan is only 36.78 percent dependent on IRA but it sources 60 percent of its income from other shares from national government which brings the total shares it receives from national taxes to 97.23 percent. The Malampaya gas exploration and development in the province has entitled Palawan to equitable shares in the proceeds from utilization and development of their natural resources.

Local government expenditures

The income generated by LGUs through different sources as discussed above are allocated across various expenditure items which should ideally support the provision of essential services that would promote development and raise the quality of life of the LGU’s constituents. Resource allocation is done through the local budgeting process which consists of the following phases: budget preparation, budget authorization, budget execution and budget accountability.

Budget preparation

Budget preparation involves the formulation of the a) estimates of income; and, b) a budget proposal to be submitted by the local chief executive to the sanggunian for deliberation and approval. The preparation phase consists of three major activities by the heads of local departments and offices.

1. On or before July 15th of each year, the local treasurer is required to submit to the local chief executive a certified statement containing the following:
   1. actual income and expenditures during the immediately preceding year;
   2. actual income and expenditures of the first two quarters of the current fiscal year; and,
   3. estimated income and expenditures for the last two quarters of the current fiscal year.
2. A Local Finance Committee is convened which is composed of the local planning and development officer, the local budget officer and the local treasurer. The committee is tasked to deliberate and submit to the local chief executive the following:
   1. Estimation of a reasonable income projection for the ensuing year;
   2. recommendations on the appropriate tax and revenue measures or borrowing appropriate to support the budget;
   3. recommendations on the level of annual expenditures and the ceilings of spending for economic, social and general services based on the LGU’s approved local development plan; and,
   4. recommendations on the amount to be allocated for capital outlay under each development activity or infrastructure project.
3. Heads of the LGU’s departments and offices prepare and submit budget proposals for the ensuing year to the local chief executive.

Based on these submissions, the local chief executive prepares the executive budget for the ensuing year to the local legislative council/sanggunian not late than October 16th of the current year. According to the LGC, “failure to submit such budget on the date prescribed… shall subject the local chief executive to such criminal and administrative penalties as provided for under this Code and other applicable laws.”

Budget authorization

Upon receipt of the budget documents from the local chief executive, the sanggunian is then tasked to enact, through an ordinance, the annual budget of the LGU for the ensuing fiscal year before the end of the current year. Ideally, the sanggunian should study, scrutinize and deliberate the estimated income and proposed budget. Legislative approval is important because it is the sanggunian which has the power to appropriate the budget. Appropriation refers to “an authorization made by ordinance, directing the payment of goods and services from local government funds under specified conditions or for specific purposes.”⁴

Once a budget is passed by the legislature, the appropriations ordinance is subject to review by authorities depending on the nature of the LGU. The Department of Budget and Management (DBM) reviews the appropriation ordinance of provinces, highly-urbanized cities, independent component cities, and municipalities within Metro Manila. The sangguniang panlalawigan (provincial council) is tasked to review the ordinance of component cities and municipalities. The review process ensures that the budgets prepared and approved by these LGUs are within the budgetary requirements and general limitations as prescribed in the Code.⁵

Budget execution

The LGC states that the responsibility for the execution of the annual budget and the accountability therefore shall be vested primarily in the local chief executive.

Budget execution involves the activities related to the disbursement of funds to be used for pre-identified programs, projects, activities contained in the approved budget. It involves the exercise of local executive of mechanisms to program and control cash disbursements. An important mechanism for control is the power to issue allotments by the local chief executive. Allotments are essentially authorizations to departments/offices to incur obligations of specific amounts to be paid out of local government funds.

Budget accountability

The Commission on Audit and DBM have promulgated rules and regulations that seek to strengthen accountability mechanisms in local finance. The New Government Accounting System (NGAS) issued by the COA contains detailed guidelines for local government units in accounting for all incomes, disbursements and budgetary accounts. It also specifies in great detail a financial reporting system which requires, among others, the preparation of year-end financial statements such as balance sheet, statement of income and expenses, and statement of cash flows. More importantly, the COA conducts audits of local government finances and publishes these audit reports on their website.

Citizens’ participation in local public finance

A significant feature of decentralization in the country is the recognition by law of the importance of people’s participation in local governance processes. The LGC mandates local sectoral representation in the sanggunian and representation of people’s organizations and NGOs in local special bodies such as the local development council, local school board and local health board. Citizens can and should engage with these to study what programs are being prioritized and assess whether due importance is given to programs and services that are most needed for the development of communities. Statutory requirements for preparation and submission of budgetary and financial reports, while necessary, are not enough to strengthen mechanisms for accountability.

Citizen’s involvement in local fiscal administration is essential in ensuring that those holding public office consistently perform their duties and responsibilities in line with the best interest of the people. Members of the public therefore need to monitor and ultimately play a role in influencing the funding priorities of local officials since the funds ultimately belong and aim to serve and support the people.  Philippine Public Transparency Reporting Project

(The author is an assistant professor at the UP National College of Public Administration and Governance.)

1. Agra, A. Seminar Handout, “Survey of Supreme Court Decisions on Local Autonomy and Local Governments from January 1, 1992 to July 31, 2005”, August 15, 2005, Ateneo Professional Schools, Makati City
2. Cardona, M. and A. Punzalan. Government Accounting, 2008 Edition. Manila: GIC Enterprises & Co. pp. 243
3. Cuaresma, J. and S. Ilago. Local Fiscal Administration in the Philippines. Local Government Center, UP college of Public Administration. 1996 pp 35
4. Cardona, M. and A. Punzalan. Government Accounting, 2008 Edition. Manila: GIC Enterprises & Co. pp 242
5. Section 324 and 325 of the LGC. Examples of these are that the total appropriated amount shall not exceed the estimated income, and mandatory setting aside five percent (5%) of the estimated revenue as calamity fund.