Government may fully cover local losses from consumption tax cut

Japan’s government is considering a plan for the expected income falls at local governments from a proposed consumption tax cut to be fully covered with special tax revenue grants from the state, sources said Saturday.

The national government is expected to present the plan at a meeting with local governments to be held shortly, along with an idea to use ordinary tax revenue grants to compensate local governments for necessary expenses linked to a proposed income-pegged benefit program.

The special grants program is designed to offset temporary dips in local government tax revenues due to changes in central government policies.

For the cash benefit plan, the national government will propose that it shoulder at least two-thirds of necessary expenses and that the remainder be split evenly between prefectural governments and municipalities.

Japan aims to introduce the benefit program in earnest in fiscal 2029. As a transitional measure until then, the national government is seeking to reduce the consumption tax rate on food from 8% to 1% for two years from fiscal 2027, which starts next April. The benefit program is planned to be partially introduced to pay out the equivalent of the remaining 1% tax rate to effectively lower the food consumption tax to zero for the two years.

The government and the ruling bloc aim to adopt a tax system reform package including the consumption tax cut plan around the middle of this month. The government plans to submit a bill on the tax reduction to an extraordinary session of parliament expected to be convened this autumn.