The pros and cons of Furusato Nozei, Japan's hometown tax programme 

In Japan, the fiscal year begins in April. And, as we approach the March accounting period, it's tax filing season.

Japanese are required to file their income tax returns by mid-March of the following year to calculate and determine the amount of income generated during the year from January 1 to December 31 and the amount of income tax imposed on it. The application for deductions for Furusato Nozei, or the hometown tax, paid during the previous year, is also submitted at this point.

Furusato Nozei is a national programme introduced in 2008 to alleviate the disparity in tax revenues between Tokyo and other urban areas and rural municipalities due to the concentration of the population and to boost the local economies and development of Japan's rural areas.

Under this system, taxpayers can choose to make donations to their hometowns or other municipalities they want to support. They then receive reciprocal exemptions in the municipalities where they live. The donation can be made up to a certain amount depending on the individual’s income and family structure.

In FY2021, more than 7.4 million citizens took advantage of this programme and the total amount of donations reached a record high of JPY830.2 billion (around $6.28 billion), making it a widely established national programme.

The donation system has attracted a great deal of attention because, in addition to a personal tax deduction, donors can receive a return gift from the municipality of their choice worth up to 30% of their donation amount, with an effective co-payment of JPY2,000 (around $15).

By paying taxes that should be paid to your municipality to another municipality, you can receive local specialities and products from various regions. The service is so successful that people joke, "if you don't use this service, you will lose money.”

Three of the top five cities with the highest amount of donations in 2021 were cities in Hokkaido, Japan's second largest island known for its treasure trove of food, with an abundance of delicious specialities such as seafood and fish products.

Hokkaido, Monbetsu City, which ranked first in the nation, collected approximately JPY15.3 billion (around $116 million) in donations. Even after deducting expenses and deductions from the amount of donations received, the city secured a large surplus of JPY7.69 billion (around $58 million), which is the balance.

Many municipalities use the funds obtained from the Furusato Nozei to expand their public services. Chiyoda-machi in Gunma Prefecture, which has a Suntory beer factory in town and produces nearly half of the company's beer, has strengthened its marketing as a beer town by incorporating Suntory's flagship beer products into its return gifts. This strategy has been successful, and donations are expected to reach JPY3 billion (around $22.7 million) in FY2022.

The town plans to use the funds to establish a new budget of JPY100 million (around $0.8 million) to develop measures such as childcare support, the promotion of immigration and cashless payments.

As part of its childcare support programme, Chiyoda-cho plans to raise the subsidy for the purchase of childcare items, such as diapers and formula milk, from one to three years of age and to triple the annual subsidy ceiling to JPY36,000 (around $270). The plan will also include specific measures to reduce the burden on households, such as providing JPY50,000 (around $380) when a child enters elementary and junior high school.

The Furusato Nozei programme tends to be used by urban residents for the purpose of making donations to rural municipalities. While the number of rural municipalities has seen significant increases in tax revenues, urban municipalities are suffering from the loss of tax revenues that they would otherwise have received.

For the 23 wards of Tokyo, more than JPY54 billion (around $408 million) flowed out to other municipalities in FY2021. The largest decrease in revenue was JPY8.4 billion (around $63 million) in Setagaya Ward, which has the largest population and number of households among Tokyo’s 23 wards. This amount is equivalent to the cost of renovating two elementary schools in the ward.

Yokkaichi City in Mie Prefecture is making headlines by publicly recruiting for a position to strategically promote Furusato Nozei with an annual salary of JPY10 million (around $76,000). The reason behind the city's recruitment, which is a generous offer for a local government employee, is the severe situation the city is facing, with a deficit in tax revenue from Furusato Nozei of ten consecutive years since 2012, reaching JPY800 million (around $6 million) in FY2021.

While urban municipalities are suffering from tax outflow, not all of the outflows are used by rural municipalities to provide public services. To secure as many donations as possible, competition among prefectures and municipalities intensified to offer better return gifts and rural municipalities that receive tax donations use approximately half of the amount paid on gifts or for advertising and administrative costs.

In urban areas where tax revenues are decreasing, there are concerns that public services to residents will not be adequately provided. While in rural areas, where tax revenues are increasing but half of the amount is allocated to non-public services, the use of tax is also being questioned. In view of this situation, the Furusato Nozei system may provide an opportunity to review the tax system itself.

It is time for Japan to reconstruct better use of tax income based on its original sense, both from the perspective of solving social issues and balancing public services that support people’s lives, as well as from the perspective of sustainable community revitalisation.