The Function of Local Allocation Taxes in the Securing of Revenue Sources: Verification of the Neutrality and Appropriateness of Local Allocation Taxes

When it guarantees the financial resources of local public entities through local allocation taxes (LATs), the national government is required to abide by several principles: neutrality (not forcing particular political intentions on local public entities); objectivity (using as the basis of calculations indicators that cannot arbitrarily be manipulated by local public entities); appropriateness (precisely measuring the fiscal demands and revenues of each local public entity); and simplicity (making calculations as simple as possible). Among these principles, there is a certain trade-off relationship between neutrality and appropriateness. In this article, which focuses on three of the types of investment cost (costs for roads and bridges, for rivers, and for agricultural administration), the authors attempt to clarify from an institutional standpoint whether national government satisfied the neutrality requirement when guaranteeing financial resources through LATs, and the authors used data from ordinary account settlements and from LATs to verify how well the national government met the appropriateness requirement. Results indicated that adjustment coefficients (cold-district adjustment and investment adjustment) other than those for project expenditure, consisted mainly of neutral indicators such as the population size, length of roads and rivers, and the area of farmlands, serving as a factor that met the appropriateness requirement without practically increasing standard financial needs (SFNs). By contrast, the adjustment of project expenditure lacked neutrality, and in addition, it failed to meet the appropriateness requirement to the same extent, as it substantially increased SFNs. Starting in 2010, the adjustment of project expenditure was basically abolished, and a decision was made to include it in the unit cost. The conclusion of this article indicates that the appropriateness requirement is fully met through adjustments other than that to project expenditure adjustment, even though the latter is not being implemented. Therefore, the shift from project expenditure adjustment to the unit cost is justified from both the neutrality and appropriateness viewpoints.