Fiscal autonomy: LGU's power to create revenues

Under the regime of the 1935 Constitution, there was no constitutional provision on the delegation of the power to tax to municipal corporations. They only derived such under a limited statutory authority, outside of which, it was deemed withheld.[1] Local governments, thus, had very restricted taxing powers which they derive from numerous tax laws. This highly-centralized government structure was later seen to have arrested the growth and efficient operations of LGUs, paving the way for the adoption of a more decentralized system which granted LGUs local autonomy, both administrative and fiscal autonomy.[2]Material to the case of Film Development Council v. Colon Heritage Realty Corp.,[3] is the concept and scope of local fiscal autonomy. In Pimentel v. Aguirre,[4] fiscal autonomy was defined as “the power [of LGUs] to create their own sources of revenue in addition to their equitable share in the national taxes released by the national government, as well as the power to allocate their resources in accordance with their own priorities. It extends to the preparation of their budgets, and local officials in turn have to work within the constraints thereof.”

With the adoption of the 1973 Constitution,[5] and later the 1987 Constitution, municipal corporations were granted fiscal autonomy via a general delegation of the power to tax.[6] Section 5, Article XI of the 1973 Constitution gave LGUs the “power to create its own sources of revenue and to levy taxes, subject to such limitations as may be provided by law.” This authority was further strengthened in the 1987 Constitution, through the inclusion in Section 5, Article X thereof of the condition that “[s]uch taxes, fees, and charges shall accrue exclusively to local governments.”[7]

Accordingly, under the present Constitution, where there is neither a grant nor a prohibition by statute, the tax power of municipal corporations must be deemed to exist although Congress may provide statutory limitations and guidelines.[8] The basic rationale for the current rule on local fiscal autonomy is the strengthening of LGUs and the safeguarding of their viability and self-sufficiency through a direct grant of general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional. The legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each LGU will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.[9]

In conformity to the dictate of the fundamental law for the legislature to “enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization,”[10] consistent with the basic policy of local autonomy, Congress enacted the LGC, Book II of which governs local taxation and fiscal matters and sets forth the guidelines and limitations for the exercise of this power. In Pelizloy Realty Corporation v. The Province of Benguet,[11] the Supreme Court alluded to the fundamental principles governing the taxing powers of LGUs as laid out in Section 130 of the LGC, to wit:
1. Taxation shall be uniform in each LGU.

2. Taxes, fees, charges and other impositions shall:

a. be equitable and based as far as practicable on the taxpayer's ability to pay;

b. be levied and collected only for public purposes;

c. not be unjust, excessive, oppressive, or confiscatory;

d. not be contrary to law, public policy, national economic policy, or in the restraint of trade.

3. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person.

4. The revenue collected pursuant to the provisions of the LGC shall inure solely to the benefit of, and be subject to the disposition by, the LGU levying the tax, fee, charge or other imposition unless otherwise specifically provided by the LGC.

5. Each LGU shall, as far as practicable, evolve a progressive system of taxation.

[1] Manila Electric Company v. Province of Laguna, G.R. No. 131359, May 5, 1999.

[2] The Province of Batangas v. Romulo,G.R. No. 152774, May 27, 2004.

[3] G.R. No. 203754, June 16, 2015.

[4] G.R. No. 132988, July 19, 2000.

[5] It was also during this time that then President Ferdinand E. Marcos issued Presidential Decree No. 231 dated July 1, 1973, enacting a local tax code for provinces, cities, municipalities, and barrios, which codified the various tax laws and echoed the constitutional policy on local autonomy.

[6] See Manila Electric Company v. Province of Laguna.

[7] Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the local governments. [Section 5, Article X, 1987 Constitution]; see Napocor v. City of Cabanatuan, G.R. No. 149110, April 9, 2003, 401 SCRA 259 [Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges x x x. This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also “dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders.]; the 1987 Constitution enunciates the policy that the territorial and political subdivisions shall enjoy local autonomy. In obedience to that mandate of the fundamental law, the LGC expresses that the territorial and political subdivisions of the State shall enjoy genuine and meaningful local autonomy in order to enable them to attain their fullest development as self-reliant communities and make them more effective partners in the attainment of national goals, and that it is a basic aim of the State to provide for a more responsive and accountable local government structure instituted through a system of decentralization whereby local government units shall be given more powers, authority, responsibilities and resources. (LTO v. City of Butuan, G.R. No. 131512, January 20, 2000)

[8] See The City Government of Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169 [The Court has taken stock of the fact that by virtue of Section 5, Article X of the 1987 Constitution,local governments are empowered to levy taxes.

[9] See Manila Electric Company v. Province of Laguna.

[10] See Article X, Section 3 of the 1987 Constitution [Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units.]; See also Napocor v. City of Cabanatuan, G.R. No. 149110, April 9, 2003, 401 SCRA 259 [Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the respective sanggunian.

[11] G.R. No. 183137, April 10, 2013, 695 SCRA 491, penned by Associate Justice Marvic M.V.F. Leonen.