Urban-Regional Redistribution
and the Heisei Mergers of Local Municipals
Ryoichi Imai

1

Major Issues
1. LAT grants redistributes income from urban
to rural areas.
2. The Heisei Municipal Merger
3. Movements for Regional Integration
4. Why fiscal integration needed? – lessens
from the EU.

2

LAT grants• Local Allocation Tax (LAT) grants from thecentral government have a function ofinterregional income redistribution.
• The size of the LAT grants is proportional tothe deficit (=expenditures minus revenues) ofthe local municipals.
• If the local municipals raise local tax revenues,
then the grants they receive from the central
government is reduced.
3

Taxation in Japan• Most tax payments are divided into the state andlocal government revenues.
– Income: 10-40% to state, 10% to local.
– Consumption: 6.3% to state, 1.7% to local.
– Corporate Tax: around 30% to state, less than 10% tolocal.
– Estate Tax: 100% to local.

• Tax payments are concentrated to urban area.
• Urban municipals pay more than receive to(from) the central government.
4

State Taxes and Subsidies per person

http://www.tr.mufg.jp/houjin/jutaku/pdf/c200601_2.pdf
5• Doi (2006) calculates thetotal effects of theinterregional income
redistribution acrossprefectures.
• For 1990-2002, the sign issignificantly negative forTokyo, Kanagawa, Aichi,
Osaka, meaning that tax
revenues dilute to otherprefectures.

http://www.tr.mufg.jp/houjin/jutak
u/pdf/c200601_2.pdf
6Regional Benefits and Costs 2008https://www5.cao.go.jp/j-j/wp/wp-je01/wp-je01-3-1-07z.html

Blue = Benefits
Yellow = Costs
Red = Net Benefits

7Moral Hazard• The “standard fiscal demand” (SFD) of each local
municipal is automatically calculated andreported to the central government.
• Then the central government compensates forthe deficit (=SFD-revenues).
• The remaining expenditure is financed by issuing
local debts, which need to be approved by thecentral governments.
• Therefore the local municipals have no incentive
to develop their own revenue resources.
8

The “30% autonomy”• Most local public investment must be approvedby the central government.
– Local metro (subways)– Shinkansen• Some of the large public investmentｓ wereapproved for the excuses to welcome foreign
visitors to the Olympic Games.
– Tokaido Shinkansen (1964)– Sapporo municipal subway system (1972)– Nagano Shinkansen (1998)9

Latest Recognition• In the recent analyses of benefits and burdens
across regions, bias among regions tends to beless of an issue.
• This is because, while income disparities between
regions are large, beneficiaries are likely to
spread across the country under the current
trend of population aging and slow economicgrowth.
• Even if you identify the interregional transfer oftax revenues as a problem, it will not lead to asolution.
10Regional Transfers

The share of public expense toregional output is high in theremote areas like Hokkaido andKyushu.

The share of tax revenues
to regional output is highin the areas surrounding
Tokyo, Nagoya, and Osaka

The net regional transfer (=costs-benefits) per regional
output is high in the areas
surrounding Tokyo, Nagoya,and Osaka
https://www5.cao.go.jp/keizai3/2008/0703pref_model03-1.pdf

11Regional Transferfor health care

2. However, the medical care transfer from theNational Health Insurance per regional output is high inrural than urban areas, which reflects the population
aging.

1. The cost burden for
medical care per regional
income is even acrossregions. It is difficult toraise the burdens for ruralareas.

3. The net burden ishigh in urban thanrural areas.

https://www5.cao.go.jp/keizai3/2008/0703pref_model03-1.pdf

12

The Heisei Municipal Mergers• In 1995, the government launched a new program toencourage those local municipals (cities, towns, andvillages) to merge with each other.
• If multiple municipals merge to a single municipal, thelatter can issue “exceptional debts” that will bereimbursed up to 70% by the central government, until
10 years have passed since the merge.
• They can use the debt revenue to renovate local public
infrastructure.
• # of municipals: 3232 (1999) ->1718 (2014)13

Before and After the Heisei Merger
Fukuoka prefecture
2002

2010

http://www.8toch.net/gappei/map.cgi?pref=40&date=pre14

Remain independent• Many local municipals remain independent,
because
1. They have abundant revenues resources enough forthem to stay independent (business and industries).
• Large factories• Nuclear power plants

2. They are afraid of the burden of the remaining debts,
since the government subsidies will be abolishedafter 10 years have passed since the merge.

15

Tragedy of Yubari City
• Yubari City in Hokkaido has lost its populationfrom 120,000 in 1960 to less than 10,000 in 2007.
• The reason is– Yubari has the largest coal mine in Japan but Japaneseindustries no longer need domestic coal.
– In the 1980s, the city invested in tourism, by building
an amusement park, developing skiing grounds, andinviting international film festivals.
– All the projects were financed by issuing debts withgovernment subsidies.
– The city was left with huge unpaid debts after all theprojects miserably failed in 1990s.
16Movements for Prefectural Mergers• In the Heisei Mergers, the government has noplan to merge prefectures.
• However, scholars and experts of local
autonomy argue that prefectures should
merge to form an integrated “state” (doh)within each region.
• For example, all the seven prefectures aresuggested to form the Kyushu Doh (九州道).
17

Why Regional Integration?
• Now local governments are directly connected to thecentral government located at Tokyo.
• Income is redistributed between the central and localgovernments.
• Large cities prosper and their population increases withineach region.
• Income inequality is not so high among regions as among
prefectures.
• Local issues can be more efficiently handled by local thancentral governments.
• The government can manage the income redistribution
system more efficiently, if it redistributes not by prefectures
but by regions.
18

The Osaka “Metropolitan” Plan
• In 2010, Tohru Hashimoto, Osaka prefecturegovernor, launched his plan
1. to abolish Osaka city and Sakai city,
2. create the Osaka special 20 districts, and3. merge all the cities to form a new Osaka
Metropolitan prefecture, following the model of
the Tokyo metropolitan prefecture.

• (April 2015) His plan was denied by thereferendum by the Osaka citizens.
19

“special” local governments• Tokyo is different from other prefectures in the sense
that– The center of Tokyo is divided into 23 districts, each ofwhich has its own mayor and assembly of representatives.
– The Tokyo prefectural governor has a strong commandover the issues within the 23 districts.

• 20 designated cities: Sapporo, Sendai, Osaka, Kyoto,Kitakyushu, Fukuoka,…
– Some cities that have more than 500,000 population canbe designated by the government,– and the prefecture delegates selected tasks andauthorities to the delegated cities.

20

Pros and Cons of the Osaka Metropolitan Plan
• Pros:– The prefecture can directly control the districts
and use their abundant tax revenues for theprefectural policies.

• Cons:– Designated cities (Osaka and Sakai) lose theirrelative independence from the prefecture.
– Abundant tax revenues of designated cities areredistributed to poor municipals within theprefecture.
21