SC orders devolution, ignites federalism joust

The Supreme Court, voting 10-3, ordered the national government to remit to the local government units (LGUs) 40 percent of all national taxes collected, and as a result, unintentionally ignited a federalism joust.

To begin with, the Constitution (Article X, Section 6) unequivocally mandated in favor of LGUs a “just share, as determined by law, in the national taxes which shall be automatically released to them.” Pursuant to this, Congress passed the Local Government Code (LGC) in 1991 fixing the LGUs’ “just share” at 40 percent of “national internal revenue taxes.”

The Court ruled, however, that the 40 percent should be based on all “national taxes” per the Constitution, not just on those imposed by the National Internal Revenue Code, thereby including customs duties, tariffs, airport fees, etc.

Further, it held that the 40 percent should be “automatically” released to the LGUs without further ado. Previous presidents of the country, while devolving some functions of the executive departments to the LGUs, refused to share the revenues.

Penned by Justice Lucas P. Bersamin, the landmark decision was voted upon on July 10, but copies of the ruling have not been released. Nonetheless, media caught glimpses of its highlights, eliciting reactions from the country’s economic team.

Finance Secretary Carlos G. Dominguez III feared that, if implemented retroactively from 1992 when the LGC took effect, the amount owed by the national government to the LGUs could reach a staggering P1.5 trillion. However, the good secretary will be relieved to know that, according to my confidential sources, the Court kindly decided on a prospective, not retroactive, implementation.

Budget Secretary Benjamin Diokno was more adamant, saying the ruling may potentially harm the country’s fiscal position and widen the budget deficit to 6 percent from the current 3 percent, thereby leading to a credit rating downgrade and, ultimately, to an inability to complete the massive “Build, build, build” program.

Diokno’s hawkish reaction was joined by Socioeconomic Planning Secretary Ernesto Pernia, who connected fiscal devolution to federalism. He explained that while federalism could unlock economic benefits, it could also be disastrous for many regions which are not ready for it, choking them with more resources and responsibilities than they could handle.

Presidential spokesperson Harry Roque allayed Pernia’s warning, arguing that the shift to federalism would not prejudice planned infrastructures because “national projects would be devolved and transferred to the allotments of LGUs.” However, he did not comment on Diokno’s concern about the budget deficit and credit rating downgrade.

The economic team’s negative reaction was echoed by private economists Bernardo Villegas and Victor Abola of the University of Asia and the Pacific. Villegas warned that federalism is both expensive and unnecessary, given that the proper implementation of the Constitution and the LGC could achieve federalism’s grand goal of devolution without “duplication of expenses.”

Abola opined that federalism could stoke hyperinflation, as it has in some federal countries in Latin America and Europe where consumer prices surged to 1,000 percent.

Rosario Manasan of the Philippine Institute of Development Studies estimated the additional cost of instituting federalism at P55 billion a year, to be borne by our taxpayers.

Sen. Panfilo Lacson was more forthright, tweeting, “If the objective is decentralization and devolution, why revise the Constitution and divide the nation? We only need to implement the [LGC] and achieve the same purpose.”

At bottom, I think the Supreme Court decision provides a refreshing pause for the proponents to restudy the economic costs and consequences of federalism.

The candid comments of the respected economists cannot be cavalierly ignored.

Moreover, the proponents also need to unify and simplify their proposals. As it is, the draft Bayanihan Constitution is quite diverse from, and in many ways contradictory, to that of the ruling PDP-Laban party and the House committee on constitutional amendments. With such diverse and confusing voices, should we wonder why the opinion polls show very little support for federalism?

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