On June 12, the Board of Audit of Japan released the results of its review of local fiscal plans, stating that the hometown tax donation program has widened discrepancies between local governments’ projected and actual revenues and expenditures. The Board therefore requested that the Ministry of Internal Affairs and Communications (MIC) assess the impact of the program. Launched in 2008, the hometown tax program allows taxpayers to make donations to local governments they wish to support, and the portion of each donation exceeding 2,000 yen is deducted from the donor’s resident and income taxes. In its first year, the program received 54,000 donations totaling 8.14 billion yen. Since then, the program has grown rapidly in scale, with the number of donations exceeding 58 million and the total amount donated reaching 1.272.75 billion yen in 2024, according to MIC.

The hometown tax program is known for the intense competition among municipalities to attract donations through return gifts—sometimes sarcastically referred to as “government-sponsored online shopping.” In response, MIC has revised the system, including a rule limiting the value of return gifts to 30% of the donation amount. In fiscal year 2024, return gifts totaled 320.8 billion yen, equivalent to 25.2% of all donations. However, once various expenses such as administrative costs, publicity and promotional costs, shipping fees, and commissions paid to intermediary websites, are taken into account, local governments retain only 53.6% of donated funds (MIC). Consequently, while tax revenue is shifted from donors' municipalities to other localities through the program, the aggregate revenue of local governments declines as a whole because a substantial portion of donations is absorbed by associated costs.

In municipalities where tax revenue outflows exceed inflows, the resulting loss of revenue not only decreases the quality of public services but also violates the principle of “benefit and burden” ----namely, that residents themselves should bear the costs of the public services they receive. Furthermore, under the current system, the ceiling on tax deductions rises with income, meaning that higher-income earners receive greater benefits. As a result, the intended redistributive function of the resident tax is weakened. More fundamentally, many of the households attracted by the sense of getting a good deal on luxury food items such as premium domestic-brand beef, king crab, and Shine Muscat grapes—are unlikely to belong to the segment of society struggling with the pressures of everyday living.

In Setagaya Ward, where the author lives, the loss of resident tax revenue through the hometown tax program totaled 13.4 billion yen, the fifth-largest outflow among municipalities nationwide. This amount is roughly equivalent to the budget required for upgrading and renovating ward-run schools, including seismic retrofitting, the installation of Western-style toilets, and heat mitigation measures. The municipality suffering the largest outflow is Yokohama City. However, about 75 percent of its revenue loss is compensated through the Local Allocation Tax system. By contrast, Tokyo’s 23 special wards receive no such compensation because they are not eligible for Local Allocation Tax grants. It is therefore unsurprising that Setagaya Ward has sharply criticized the program as “an unreasonable tax system that undermines the very foundation of local autonomy,” according to the FY2026 Initial Budget Overview.

The philosophy behind the hometown tax program and a measure of moderate competition among municipalities are understandable. Yet “competition over a shrinking pie” cannot provide a fundamental solution as Japan's population and tax base continue to shrink. It is time to reexamine the nature of local autonomy and the fiscal foundations that support local government.

Takashi Mizukoshi, the President
This Week’s Focus, June 14 – June 18, 2026