Government weighs covering local revenue loss from food tax cut

2026-08-11

The government is considering covering local revenue losses from a consumption tax cut on food items starting in April 2027 with central government funds. It plans to offset the expected local shortfall of about 1.6 trillion yen, if the tax rate is lowered to 1%, with a special local grant to limit the impact on local government finances.

Covered by special local grants

Special local grants are distributed by the central government to make up for tax revenue losses incurred by municipalities from government tax cuts and other measures. When the old provisional surcharges on gasoline and diesel taxes were abolished in 2025, the entire local revenue loss for fiscal 2026 was covered.

National tax revenue down 4.3 trillion yen a year

If the consumption tax rate on food items is cut from the current 8% to 1%, national tax revenue would fall by about 4.3 trillion yen a year. Of that, local governments are expected to see a revenue loss of about 1.6 trillion yen because of lower local consumption tax revenue and local allocation tax.

In a statement on the 5th, the National Governors' Association and others asked the central government to ensure the necessary funding is secured for local revenue losses. Consumption tax revenue is used to fund social security measures such as pensions, medical care, nursing care and measures to address the declining birthrate, so concerns have also emerged from local governments about maintaining services. Chiba Governor Toshihito Kumagai said the premise must be that local government tax revenue is not affected, and warned that it could become difficult to maintain resident services such as free child care fees and home-visit nursing care.

Local governments also to share benefit costs

The basic policy for the consumption tax cut approved by the cabinet on the 5th states that the government will 'respond appropriately so that there is no hindrance to local government finances.' In addition to the food tax cut, the government will start an income-linked benefit scheme for low- and middle-income workers from fiscal 2027. It plans to make advance payments funded by about 600 billion yen a year, equivalent to 1% of the consumption tax cut, before rolling out the program fully in fiscal 2029.

While the central government will cover local revenue losses from the food tax cut, it is moving toward asking local governments to share the funding burden for the new benefit scheme. The government believes it is appropriate for the central and local governments to share costs in line with their respective tax and social security burdens, since the purpose of the scheme is to ease the burden of income tax, local resident tax and social insurance premiums. It presented the government proposal at a central and local government council meeting held on the 10th, but local governments pushed back on the benefit plan, saying that 'the central government should fully cover it at its own responsibility.'

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