Institute of Politics and Governance

Internal Revenue Allotment: Issues, Incursions and Implications
Atty. Dan Gatmaytan

The significance of the IRA cannot be understated. The allocation of internal revenue does not flow from the generosity of central government-it is a right that accrues to local governments by virtue of the additional responsibilities that they bear under the Constitution. The Supreme Court in Alvarez v. Guingona, Jr. explained its importance in the following words:

The practical side to development through a decentralized local government system certainly concerns the matter of financial resources. With its broadened powers and increased responsibilities, a local government unit must now operate on a much wider scale. More extensive operations, in turn, entail more expenses. Understandably, the vesting of duty, responsibility and accountability in every local government unit is accompanied with a provision for reasonably adequate resources to discharge its powers and effectively carry out its functions. Availment of such resources is effectuated through the vesting in every local government unit of (1) the right to create and broaden its own source of revenue; (2) the right to be allocated a just share in national taxes such share being in the form of internal revenue allotments (IRAs); and (3) the right to be given its equitable share in the proceeds of the utilization and development of the national wealth, if any, within its territorial boundaries.

The funds generated from local taxes, IRAs and national wealth utilization proceeds accrue to the general fund of the local government and are used to finance its operations subject to specified modes of spending the same as provided for in the Local Government Code and its implementing rules and regulations. For instance, not less than twenty percent (20%) of the IRAs must be set aside for local development projects. As such, for purposes of budget preparation, which budget should reflect the estimates of the income of the local government unit, among others, the IRAs and the share in the national wealth utilization proceeds are considered items of income. This is as it should be, since income is defined in the Local Government Code to be all revenues and receipts collected or received forming the gross accretions of funds of the local government unit.

The IRAs are items of income because they form part of the gross accretion of the funds of the local government unit. The IRAs regularly and automatically accrue to the local treasury without need of any further action on the part of the local government unit. They thus constitute income which the local government can invariably rely upon as the source of much needed funds....

The impact of the increase in the internal revenue allotment is tremendous. From 1985-1991, total receipts of local governments amounted to 1.7 percent of the gross national product (GNP). This amount was divided equally between local and external sources of revenue, the latter being almost exclusively from the IRA.

In 1992-1997, after the Local Government Code went into effect, external revenues expanded from 52.0 percent in the earlier period to 64.7 percent after 1992. Local government income from external sources shot up from 0.9 percent to 2.2 percent of GNP. LGU local source revenues moved upwards from 0.8 percent to 1.2 percent of GNP. The ratio of local revenue to the GNP increased during the effectivity of the Code, only in cities. In every local government unit, the share of externally-generated revenue expanded between 1992-1997.

In a study conducted by the Local Development Assistance Program noted that in the past decade, the IRA accounted for at least 36% of the total local revenues. This went up to almost 56% in 1992, after the Local Government Code took effect. The study noted that in lower income municipalities, the IRA contributes from 65% to 90% of their total revenues. The IRA now remains a major revenue source of local governments as their share to total local income swelled from 50.4% in 1991 to 67.7% in 1994.

The increase in the IRA also produced some unintended effects.

Automatic appropriations obviously appeal to many politicians. The attractiveness and availability of the IRA fuels the fragmentation of local government units. The Bureau of Local Government Supervision in a recent study claimed that the proliferation of local government units (43,621 at present) is fueled by parochial concerns-the product of a strong political lobby, which increased after the enactment of the Local Government Code. In aiming for a piece of the IRA pie, fragmentation of local government units ironically reduces the available IRA because a fixed amount of money is now divided among several governments.

Worse, the limited tax base also accounts for the failure of local governments to generate local income to match the IRA. In other words, without a corresponding increase in the number of taxable entities, local governments cannot increase the locally-generated revenue.

This could help explain why-as officials of the Department of Finance claim- local government officials are "totally dependent" on their IRA and are neglecting other revenue-generating mechanisms that are available.

III. THE CASE

On December 27, 1997, President Fidel V. Ramos issued Administrative Order No. 372, which requires local government units to reduce their expenditures by 25% of their authorized regular appropriations for non-personal services, and withholds 10% of the IRA of local government units. On December 10, 1998, President Estrada issued Administrative Order No. 43 and reduced the amount to be withheld from the LGUs to five percent.The pertinent provisions of the Administrative Order No. 372 are as follows:

SECTION 1. All government departments and agencies, including state universities and colleges, government-owned and controlled corporations and local governments units will identify and implement measures in FY 1998 that will reduce total expenditures for the year by at least 25% of authorized regular appropriations for non-personal services items, along the following suggested areas...

SECTION 4. Pending the assessment and evaluation by the Development Budget Coordinating Committee of the emerging fiscal situation, the amount equivalent to 10% of the internal revenue allotment to local government units shall be withheld.