A primer on the Mandanas ruling and how things might play out in fiscally constrained times

FOR DECADES, the government maintained an extremely literal interpretation of the words “internal revenue,” taking the view that it referred to the collections of the Bureau of Internal Revenue (BIR). This is no mere quirk of semantics, since what constitutes “internal revenue” is literally a billion-peso question. Local governments have contended for years that they are entitled to their full 40% share of ALL government tax collections, and not just their share of “internal revenue,” as implied by the previous name of their government subsidy, the INTERNAL REVENUE Allotment (IRA). How we got from there to the subsidy’s new name, the National Tax Allotment (NTA), is a tale in itself, involving a years-long struggle on the part of local governments to gain access to a bigger share of the National Government’s income.

Our story starts with the Local Government Code of 1991 (Republic Act No. 7160). It is a document infused with the spirit of devolution, drafted (by Senator Aquilino Q. Pimentel, Jr.) with a view towards giving local government units (LGUs) the means to invest in their own capacity to govern.

But the unblemished truth is that many LGUs cannot function without some sort of subsidy, being incapable or unwilling to generate resources of their own. Thus Mr. Pimentel saw fit to legislate a 40% share of the “national internal revenue taxes on collection of the third (3^rd) fiscal year preceding the current fiscal year.” This share he called the IRA.

In simple terms, the LGUs get a cut of the National Government’s “internal revenue” from three years prior — which means that in 2022, their take will be based on the National Government’s 2019 income.

The Code also prescribes a way to divide the IRA spoils, with provinces getting 23% of the kitty, cities 23%, municipalities 34%, and barangays 20%. Within each category of LGU there are further criteria for distribution, with a full 75% of the distribution formula weighted towards population (50%) and land area (25%).��

This manner of distributing the pot may have driven mayors to seek out ways to maximize their take. The most popular means of doing so is to convert a municipality into a city — thus bumping up a town to a category with fewer entities to share IRA with. There are just under 1,500 municipalities in the Philippines, who have to share a kitty of 34% of the National Government allocation. By way of contrast, cities have to share a 23% pot, but there are less than 150 of them. Do the math, and you will conclude that mayors have an overwhelming incentive to want to graduate from municipality to city status.

Into our narrative steps the hero of our story (or villain, if you’re the Department of Finance, which is not at all fond of losing control of money that it worked hard to generate) — Hermilando I. Mandanas, governor of Batangas, and the petitioner of record to the Supreme Court in a ruling that would set the tone for how the Local Government Code’s provisions on revenue sharing need to be interpreted. His basic argument was that local governments need to be given more than just “internal revenue.” And the Supreme Court happened to agree with him.

In a 2018 resolution issued by then-Chief Justice Lucas P. Bersamin, the court formally declared as “UNCONSTITUTIONAL” (the capital letters are the Court’s own wording, and not added for emphasis) the phrase “internal revenue” as defined in Section 284 of the Code. It also ordered the phrase “DELETED” (again, the Court’s own wording) from Section 284. It also ordered a rewrite of Section 284 to read: “Local government units shall have a share of the national taxes…”

The Mandanas petition no doubt benefited from a provision in Section 5 of the Code that required any disputes over interpretation of a local government’s powers to be “liberally interpreted in (the local government’s) favor”��and that any such questions “be resolved in favor of devolution of powers.”

Long story short, the IRA is now the NTA, the National Government needs to throw into the NTA pot a share of the collections of non-BIR agencies like Customs, and Mr. Mandanas is the idol of every last governor and mayor and barangay captain in the land. And everybody lived happily ever after… well, not quite.

The Code allows the National Government an escape clause in the event of an “unmanageable public sector deficit.” Should that happen, the President is authorized to knock down the IRA (now NTA) from 40% to as little as 30%. This nuclear option may be resorted to only on the recommendation of the Secretaries of Finance, Interior and Local Government, and Budget, as well as consultation with Congress and representatives of the local government associations. It is unclear how bad the deficit will need to be for such an option to be resorted to, but the recent loading up of National Government debt — to beyond the 60% of GDP deemed sustainable for developing countries — might be something to watch, because it could mean we are creeping closer to a trigger event for a 30% NTA. The temptation to declare such an emergency grows the more straitened the government’s finances become.

Fiscal emergencies aside, the question remains — what will LGUs do with the extra money? The previous government’s Finance department immediately started drafting plans to devolve functions to the local level which were formerly handled by the National Government. This eventually led to Executive Order (EO) No. 138, which outlined a devolution timetable with a 2024 end date. The EO put a number to the value of devolved functions — P234.4 billion.

We have no access to the complete list of functions the National Government proposes to shed. But we do know that some departments are no-brainers for devolution. The Department of Agriculture (DA) comes to mind — if there were any arm of government best suited to be run by rural constituencies, it would be the DA. For reference, P234.4 billion is about 341% of the DA’s 2021 budget. The Department of Social Welfare and Development (DSWD) seems like a suitable candidate as well. If local governments were to perform DSWD functions, the P234.4 billion would be equivalent to nearly 139% of the department’s 2021 budget.

Of all the functions performed by the National Government, perhaps nothing needs to be brought closer to the people than healthcare. Assuming all the devolution in EO 138 were done on the healthcare side, the P234.4 billion would represent more than 173% of the Department of Health’s (DoH) 2021 budget. That’s a lot of hospitals, and may require a degree of persuasion (or coercion) on the government’s part for doctors 1. not to emigrate; 2. not to congregate exclusively in the big cities; and 3. to spend at least part of their time addressing the rural-urban imbalance in access to doctors. As things stand, the Philippines’ hospital bed-to-patient ratio was estimated in 2019 at 591 to one in Metro Manila but 4,200 to one in Mindanao.

Assuming that local governments get their hands on more money — and it’s not at all certain how much more, because the 2023 NTA will be based on the National Government’s tax collections during the pandemic year of 2020 — will they be capable of disbursing it all in productive ways? The World Bank estimates that the NTA kitty could grow by as much as 55%, and expressed confidence that devolution will “improve capacity… and enhance transparency and accountability” en route to decentralizing the Philippine State. Some have expressed the opinion that the Philippines has somehow accidentally blundered into federalism by some other means. It is possible to be optimistic about well-resourced local governments being more responsive to the needs of people nearest them. It is also possible to be pessimistic. Time will tell. —�� T.R. Medina