Redefining Local Autonomy: LGUs' Just Share in National Taxes

The Supreme Court's 2019 ruling in Mandanas v. Executive Secretary (G.R. No. 199802 and ) reshaped the financial relationship between the national government and local government units (LGUs). The Court declared that the phrase "internal revenue" in the Local Government Code was unconstitutional, effectively expanding the base from which LGUs compute their just share. This decision, which denied the government's motion for reconsideration, has significant implications for local fiscal autonomy and the distribution of national wealth.

The Dispute: What Counts as the Base?

The case centered on Section 284 of Republic Act No. 7160, the Local Government Code, which originally provided that LGUs shall have a share in "national internal revenue taxes." Petitioners, including local officials and a congressman, argued that this phrase unduly limited the constitutional mandate. They contended that Section 6, Article X of the 1987 Constitution requires LGUs to receive a just share in It held that this provision embodies three mandates: LGUs shall have a just share in national taxes; the share shall be determined by law; and the share shall be automatically released. The phrase "as determined by law" qualifies only the "just share," not the base of "national taxes."

The Ruling: Broadening the Base

The Court declared the phrase "internal revenue" in Sections 284, 285, 287, and 290 of the Local Government Code unconstitutional and ordered its deletion. Consequently, the just share of LGUs—ranging from 30% to 40% depending on the year—must now be computed from all national taxes, not just internal revenue taxes.

The decision specifically enumerated what must be included in the base: internal revenue taxes under of the National Internal Revenue Code; tariff and customs duties collected by the Bureau of Customs; portions of taxes collected in the Autonomous Region in Muslim Mindanao; a share of national taxes from the exploitation of national wealth; and certain excise and franchise taxes. The Court also clarified that taxes levied for special purposes, such as those for tobacco farmers or the Commission on Audit's auditing fee, may be excluded.

Why the Court Rejected the Government's Arguments

The Court rejected the government's contention that Congress could choose the base. It emphasized that the Constitution itself pegged the base to national taxes, and Congress cannot depart from the letter of the Constitution. The Court also dismissed concerns about financial burden, noting that its duty of judicial review requires it to strike down unconstitutional provisions even if the consequences are financially significant.

The Court likewise denied the LGUs' claim for arrears, ruling that the decision applies prospectively. This means LGUs cannot recover the difference between what they received and what they should have received under the new computation.

Practical Takeaways

• Broader base, bigger shares: LGUs are now entitled to a share of all national taxes, including customs duties, which were previously excluded.
• Automatic release: The Court reiterated that the just share must be released automatically, without need for further action, on a quarterly basis.
• No retroactive claims: LGUs cannot claim arrears for past years; the ruling applies only from its effectivity.
• Congressional limits: Congress cannot narrow the constitutional base for LGUs' just share, even if it determines the percentage share.
• Special funds remain: Taxes collected for special purposes, like tobacco excise taxes, may still be excluded from the base.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.