The Internal Revenue Allotment (IRA), now called the National Tax Allotment (NTA) since 2022, is a key part of how local government units (LGUs) in the Philippines get funding. It’s the share of national taxes given to provinces, cities, municipalities, and barangays to help them run their operations and deliver services. It explains what the IRA is, how it works, why it matters, and how it impacts local communities.

What is the Internal Revenue Allotment?

The Internal Revenue Allotment is a portion of the national government’s tax revenue shared with LGUs. It’s designed to support local governments in providing essential services like healthcare, education, infrastructure, and public safety. The IRA comes from taxes collected by the Bureau of Internal Revenue (BIR) and, since the 2018 Mandanas-Garcia Supreme Court ruling, also includes taxes from the Bureau of Customs and other agencies. This ruling expanded the revenue base, increasing the funds LGUs receive.

The Local Government Code of 1991 (Republic Act No. 7160) sets the rules for the IRA. It ensures LGUs get a fair share of national taxes, which is automatically released to them. This funding is critical because many LGUs, especially smaller ones, rely heavily on it—sometimes up to 98% of their budget comes from the IRA.

Why the IRA Matters

The IRA is the backbone of local government financing in the Philippines. Without it, many LGUs would struggle to maintain basic services or fund development projects. For example, municipalities often depend on the IRA for 90% of their revenue, while cities, which have more local income sources like property taxes, rely on it for 50-70% of their budget. The funds help LGUs:

• Build and maintain roads, bridges, and public buildings.

• Provide healthcare services and education programs.

• Support local development projects, with at least 20% of the IRA set aside for these initiatives.

• Pay for salaries and operational costs.

The automatic release of the IRA ensures LGUs can plan their budgets without worrying about delays or political interference. However, in extreme cases, like an unmanageable public sector deficit, the national government can adjust the allotment, but it must stay above 30% of the national internal revenue taxes collected three years prior.

How is the Internal Revenue Allotment Calculated?

The calculation of the IRA (or NTA) follows a clear formula outlined in Sections 284 and 285 of the Local Government Code. Here’s a step-by-step breakdown:

1. Determine the Total Revenue Base

The IRA is based on national taxes collected three years before the current fiscal year. For example, the 2023 NTA used tax collections from 2020. In 2020, the national government collected PHP 2,504.40 billion in tax revenue, including customs duties.

2. Allocate 40% to LGUs

By law, 40% of the total tax revenue from three years prior is allocated to the IRA. For 2023, this should have been PHP 1,001.76 billion (40% of PHP 2,504.40 billion). However, adjustments due to economic factors, like the impact of COVID-19, reduced the actual amount to PHP 820.20 billion in some cases.

3. Distribute Among LGUs

The total IRA is divided among LGUs based on their type (provinces, cities, municipalities, barangays) and a formula considering:

• Population (50%): LGUs with larger populations get a bigger share.

• Land Area (25%): LGUs with larger land areas receive more.

• Equal Sharing (25%): This ensures every LGU gets a baseline amount.

The distribution is further split as follows:

• Provinces: 23%

• Cities: 23%

• Municipalities: 34%

• Barangays: 20%

Each LGU’s share is calculated using the formula, ensuring fairness based on size and needs. Barangays also get a portion of their LGU’s IRA, with a small amount set aside for their youth councils (Sangguniang Kabataan).

Adjustments and Transparency

The IRA is automatically released to LGUs, as mandated by the Constitution (Article X, Section 6). The Department of Budget and Management (DBM) oversees the process, ensuring transparency. LGUs can access details about their NTA through the DBM’s website, which provides reports on allocations for provinces, cities, municipalities, and barangays.

Challenges and Issues with the IRA

While the IRA is vital for LGUs, it comes with challenges that affect its effectiveness.

Dependence on IRA

Many LGUs, especially smaller municipalities and barangays, rely almost entirely on the IRA. This heavy dependence limits their ability to generate local revenue through taxes or businesses, making them vulnerable to fluctuations in national tax collections. For example, during the COVID-19 pandemic, reduced tax revenues led to smaller IRA shares, impacting LGU budgets.

Unequal Distribution

The current formula prioritizes population and land area, which can lead to unequal outcomes. Wealthier cities often get larger shares they don’t fully need, while poorer LGUs struggle to meet their needs. Some experts suggest revising the formula to include factors like poverty levels or financial needs to ensure fairer distribution.

Mandanas-Garcia Ruling and Devolution

The 2018 Mandanas-Garcia Supreme Court ruling increased LGU funding by including customs duties in the revenue base. In 2024, LGUs received PHP 871.3 billion, a PHP 50 billion increase from the previous year. However, this came with greater responsibilities, as LGUs had to take on more devolved functions like healthcare and social services. Many LGUs, especially smaller ones, lack the skills or resources to handle these new tasks effectively.

Mandatory Expenditures

The national government requires LGUs to allocate portions of their IRA to specific areas, like 20% for development projects. While this ensures funds are used for growth, it can limit flexibility for LGUs with unique needs, such as disaster recovery or emergency services.

Impact of the IRA on Local Communities

The IRA directly affects the quality of life in local communities. When used effectively, it funds projects that improve infrastructure, healthcare, and education. For example:

• A barangay might use its IRA to build a new health center, making medical care more accessible.

• A municipality could repair roads, boosting local trade and mobility.

• Cities might invest in schools or job training programs, reducing poverty.

However, inefficiencies or mismanagement can limit these benefits. Some LGUs struggle with planning or lack the capacity to implement projects, leading to underused funds. Studies, like one from the Philippine Institute for Development Studies, show that while the IRA supports inclusive growth, it hasn’t fully achieved shared growth, where benefits reach the poorest communities.

Recent Developments in the IRA

The shift from IRA to NTA in 2022, following the Mandanas-Garcia ruling, marked a significant change. The increased funding has given LGUs more resources, but it’s also raised expectations. The DBM and other agencies are working to improve transparency and help LGUs build capacity to manage their funds. For instance, the DBM’s website now offers detailed NTA reports, making it easier for LGUs to track their allotments.

There are also ongoing discussions about revising the IRA formula. Groups like the Constitutional Reform (CORE) advocate for including factors like financial needs and organizational capacity in the calculation to make the system fairer. These changes could help poorer LGUs catch up and reduce regional inequalities.

Conclusion

The Internal Revenue Allotment, now known as the National Tax Allotment, is a lifeline for local government units in the Philippines. It provides the funds needed to deliver essential services and drive local development. While the system has challenges, like unequal distribution and heavy reliance by some LGUs, it remains a cornerstone of fiscal decentralization. Recent changes, like the Mandanas-Garcia ruling, have increased funding but also highlighted the need for better capacity and fairer allocation formulas. By addressing these issues, the NTA can better support LGUs in creating thriving, equitable communities across the Philippines.