Fiscal Sustainability, Equity, and Allocative Efficiency in the Light of the 2019 Supreme Court Ruling on the LGUs' Share in National Taxes

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In 2019, the Supreme Court ruled with finality on separate petitions filed by Batangas Governor Herminaldo Mandanas et al. and Bataan Governor Enrique Garcia regarding the share of local government units (LGUs) in national internal revenue taxes as mandated under Section 284 of the 1991 Local Government Code (LGC). According to the petitioners, there are errors in the computation of the internal revenue allotment (IRA). As a result, the IRA in 2022 will increase by PHP 225.3 billion relative to what it would have been prior to the promulgation of the said ruling to reach PHP 1,102.7 billion. To ensure the sustainability of the national government’s fiscal position, this study proposes that said increase in the IRA be sourced by unfunding programs, activities, and projects (PAPs) in the budgets of some national government agencies that are actually intended to deliver functions assigned to LGUs under the LGC. It then proceeds to these PAPs on the basis of the 2020 General Appropriations Act. It also evaluates the impact of this financing scheme on the vertical fiscal balance across different levels of local government and horizontal fiscal balance across individual LGUs within each level of local government.