Where the LGUs Money Comes From

Where do local governments get the money to fund their budgets? They come from:

1.   Internal Revenue Allotment (IRA). The share of the LGUs from the taxes collected by the national government such as Income Tax, Value Added Tax, Excise Tax and Capital Gains Tax. Many LGUs remain independent on the IRA as their funding source. In some areas, if not all, the IRA becomes a disincentive for LGUs to improve collection of local taxes, especially real property tax. The law clearly requires the national government to automatically release the IRA directly to the provincial, city, municipal or barangay treasurer within five (5) days after the end of every quarter, and bars the national government from imposing any lien or holdback.

Under the Local Government Code, 40% of BIR's annual collection goes to LGUs. The amount is divided thus: 23% for the provinces, 23% for cities, 34% for municipalities, and 20% for barangays. In most municipalities, the IRA accounts for 90% of their income. LGUs are mandated under the Code to allocate 20% of their IRA to development projects.

2.   Real Property Tax. Real property tax is considered as the most important sources of revenues, accounting for more than a third of local receipts. LGUs can collect four (4) types of real property tax, provided they are covered by appropriation ordinances: (a) Basic real property tax, (b) Additional real property tax for the Special Education Fund, (c) Idle land tax, and (d) Special levy on land benefited by local public works.

The real property tax collection efficiency (or the ratio of actual collections to potential collectibles) of LGUs is dismal. In municipalities, like Basey, collections efficiency ranges from 30 to 40 percent. Local officials rarely make full use of the provisions of the law to raise revenues because they are politically unpopular. They have been soft in collecting taxes and running after tax delinquencies. Many LGUs hardly worry because they always have the IRA to fall back on.

3.   Business Tax. The annual tax is imposed on the act of operating a business enterprise and computed on the basis of gross receipts. The LGUs prepares a tax schedule for different business clusters such as manufacturers, wholesalers, exporters, retailers, contractors, banks and financial institutions, and peddlers. Also, LGUs are allowed to impose community tax (cedula) from individual/entity having income and real property.

4.   Fees/charges from regulation and inspection of businesses and activities. Fees are paid to local governments in relation to the service rendered in regulating or inspecting business or activity such as the privilege to operate an establishment or practice of profession. Charges cover service fees, user charges and direct charges that are paid in exchange for certain services or consumption of goods sold or operated by LGUs. Local fees and charges include:

·         Regulatory fees in construction: building permits, plumbing permit, electrical permit, mechanical permit, occupancy permit, plumbing inspection, mechanical inspection, inspection fees, demolition, fire certificate, sanitary permit.

·         Regulatory fees in business: mayor’s permit, weights and measures, tricycle operation, sanitary inspection, storage of inflammable and combustible material.

·       Regulatory fees in non-business: marriage permit and solemnization, tax clearance fees, burial permit, impounding/sales of stray animals, exhumation/removal of cadaver, police clearance, sheriff’s fees, court fees, fiscal’s clearance, fees on holding benefits, firearms permit, registration of large cattle.

·         Service fees: secretary’s certification fee, traffic violations, garbage, hospital fees, overnight parking, terminal fee, tuition fees, parking fees, health services, physical examination fees.

5.   Operate public enterprise. Receipts from markets, hawkers, slaughterhouses, electric light and power, cemeteries, waterworks system, ferries and wharves, barangay multi-purpose halls, parking areas, own and manage public buildings for lease to private parties.

6.   Credit Financing/Borrowing. The Code lists infrastructure and socio-economic development projects, equipment, renovation of city and town halls, and purchase of lost as eligible loans from government financial institution, private banks, other local governments, and foreign sources such as Official Development Assistance (ODA) or foreign aid obtained from government agencies through diplomatic channels and official representations.

7.   Build-Operate-Transfer. Private sector to participate in financing, building, operating and maintaining roads, bridges, public markets and infrastructure projects under this scheme for a fixes term. The private sector charges facility users to enable to recoup its investment. Then, the private sector transfers the facility to the LGU at the end of the fixed term, which shall not exceed 50 years.

8.   Bond Flotation. LGUs have floated bonds to boost local revenues and they become borrower whenever they issue revenue bonds. Parties who purchase the bonds become investors.