IRA design issues and challenges Rosario G. Manasan Philippine Institute for Development Studies Surian sa mga Pag-aaral Pangkaunlaran ng Pilipinas Policy Notes No. 2007-09 (December 2007) ISSN 1656-5266 Background The Local Government Code or LGC (Republic Act 7160) of 1991 and the Organic Act for Muslim Mindanao (Republic Act 6734) of 1989 1 jointly define central-local relations in the Philippines. Both pieces of legislation include provisions that increased the share of local government units (LGUs) in central government revenues, broadened LGU taxing authorities, and devolved to LGUs functions that used to be assigned to central govern- ment agencies. As is the case in other countries, there is a mismatch between the revenue-raising capacities and expenditure needs of various levels of local government in the Philippines (Table 1). Many types of taxes are either easier to administer at the central level or are deemed to be unsuitable for local subnational government imposition because their tax bases are geographically mobile. On the other hand, the principle of subsidiarity implies that many functions are best assigned to local governments. In this context, intergov- ernmental transfers are generally viewed as an instrument that may be used to correct for the imbalance in the tax and expenditure assignment. In the Philippines, intergovernmental trans- fers or central government transfers to LGUs are of three types: formula-based block grants (i.e., internal revenue allotment or IRA), origin-based share in central government revenues (i.e., share in national wealth and other taxes), and ad hoc categorical grants. In principle, LGUs have almost full discretion PIDS Policy Notes are observations/analyses written by PIDS researchers on cer- tain policy issues. The treatise is holistic in approach and aims to provide useful inputs for decisionmaking. The author is Senior Research Fellow at the Institute. The views expressed are those of the author and do not necessarily reflect those of PIDS or any of the study’s sponsors. ______________ 1 This law was subsequently amended in 2001. brought to you by CORE View metadata, citation and similar papers at core.ac.uk provided by Research Papers in Economics