Editorial: Japan must end thank-you gifts feeding money-munching hometown tax system

The annual total donations for Japan’s hometown tax donation program, which allows people to give money to a municipality of their choice to get a deduction on their residents’ taxes, has exceeded 1 trillion yen (about $6.81 billion) for the first time. There is no end in sight to the system’s expansion, presenting a serious situation that distorts tax finances.

In fiscal 2023, the total amount of donations increased by 20% from the previous year to some 1.12 trillion yen. This represents more than a doubling of the about 490 billion yen (approx. $3.34 billion) donated in fiscal 2019 in just four years. The number of people using the system also has surpassed 10 million for the first time.

Due to heated competition among municipalities to give the priciest thank-you gifts for donations, regulations were introduced to limit the cost of these gifts to less than 30% of the donation amount. However, donations still flow overwhelmingly to local governments offering popular thank-you items — a fact that has become baked into the system.

About half of the donations to municipalities are used to cover return gifts, administrative fees, and other expenses. As a result, the larger the donation, the more overall local tax revenue decreases. The central government reimburses local bodies for 75% of tax revenue lost to other municipalities through the donation deductions. These reimbursements are drawn from tax money allocated to local governments, meaning the hometown tax system is also putting pressure on this source of funds.

There are new moves to correct these negative effects. In June, the Ministry of Internal Affairs and Communications, which oversees the hometown tax program, announced a policy effectively banning intermediary websites — essentially online catalogs listing municipalities and their thank-you gifts to facilitate donations — from giving reward points to donors starting in October 2025. Some of the sites are opposing this move.

The ministry argues that awarding points deviates from the original purpose of the system, which is to support municipalities. It also notes that the fees paid by municipalities to intermediary sites might be used as the “source” funding these point systems. If so, measures should have been taken earlier.

The upcoming regulation of points also reflects the ministry’s intent to curb the total amount of donations. However, this can only be seen as a superficial measure.

The hometown tax program has turned into a catalog shopping spree for thank-you gifts and is being used as a tax-saving strategy by the wealthy. Unless this reality is directly addressed, the problem will not be resolved.

To return to the original purpose of donating to support one’s favorite municipality or hometown, ultimately, the return gifts must be abolished. First, the maximum tax deduction limits should be gradually reduced to shrink the total amount of donations and move away from reliance on return gifts. Immediate action is required.