FEDERALISM, MONEY, AND TAXES

UNDER federalism, taxes imposed on production or sale of goods and provision of services ( VAT, excise taxes, percentage taxes) are much more difficult to deal with.

To achieve their objective, federalism proponents may want to move the collection of these goods/services tax to the states as much as possible.

Under that scenario, the best solution is a dual-track one. First, convert these goods/services tax into a system of sales tax. For goods sold or services provided in the state territory, the state will collect the sales tax on those transactions.

For imported raw materials for conversion[1] and imported finished goods for sale, the equivalent sales tax on these goods and the corresponding customs duties will be collected by the federal government and subsequently allocated. Similarly, taxes such as gross receipts tax on financial institutions, taxes on insurance companies, documentary stamp tax, and similar other taxes will be collected by the federal government and then allocated.

Under this dual-track system, income tax and sales taxes on goods sold and services provided in the states territory will be collected by the states. The equivalent sales taxes on other goods and services will be collected by the federal government and allocated among itself and the states.

Will such a taxation system achieve the objective of Philippine federalism?

It all depends upon the quantum of the taxes collected respectively by the federal government on the one hand and the states on the other hand. If the former collects more than the amount it needs, then the states will still be in some kind of control by the federal government, as they still will not be truly fiscally independent.

It should be noted that the forgoing dual-track solution requires an overhaul of the system of taxes on goods and services. Such an overhaul needs serious study, especially of the effects of the changes on the overall federal economy.

If a tax overhaul is not desired, then the only alternative is to let the federal government continue to collect all the national taxes, including income tax, as before and allocate all the taxes on a fair basis among the federal government and the states. If this alternative is taken, however, then the whole rationale for Philippine federalism collapses.

Any system of allocation of all national tax collections with the federal government as the sole collector can be done by the present unitary government. So why do we need to shift to federalism and incur additional government restructuring costs? On Day 1 of federalism, who will pay the existing national debt which was reported recently at P6.9 trillion? It depends upon who collects the taxes.

If each of the federal units collects a portion of the taxes, the debt maybe be apportioned among the federal government and the various states and each one has to settle its allocated portion as the debts mature.

However, dividing up the existing national debt may not be practicable.

The creditors may not agree as the newly formed states do not have any credit history to speak of. The existing debt may have to stay with the center, but the center must ensure that it has enough money to pay for maturing debt.

There is an additional consideration.

Much of the maturing debts will have to be refinanced, as the maturing amount cannot be paid wholly from tax revenue as is currently happening.

Since it is unlikely that the existing national debt can be divided up, the federal government may have to handle the refinancing. Again, it has to ensure that it has the funds to pay for the refinancing when it matures.

Note, though, that the circumstances of the federal government may have substantially changed — it may no longer earn all the tax revenue to pay for the debt as it was before.

Under this changed condition, international credit rating agencies may likely lower the country’s credit rating, resulting in higher interest costs. New borrowings (as distinguished from existing debt and its refinancing) will have to be handled separately by the federal government and the various states for their own respective needs.

It does not make sense for the federal government to borrow on behalf [2]of the states. If it does, the entire process will be messy.

This is true irrespective of whether the states collect the national taxes directly or the