Local taxes are the most important source of revenue for Japanese local governments. Local taxes account for 35% of total annual revenue of all local governments, for 32% at prefectural level and 34% at municipal level.
In fiscal year 2011, the total amount of local tax revenue was ¥34.2 trillion, ¥13.8 trillion for prefectures and ¥20.4 trillion for municipalities.
The Local Tax Law provides for the basic system of local taxes. Different from the Australian and New Zealand models, there are a various types of local taxes in Japan: 12 types of prefectural taxes (10 types of ordinary and 2 types of earmarked taxes), and 13 types of municipal taxes (6 types of ordinary and 7 types of earmarked taxes). In addition to these, local governments may create local taxes by their own by-laws if they receive the consent of the Minster for Internal Affairs and Communications.
Among local taxes, residential income tax, fixed asset tax and corporate income tax are the most important. Residential income tax is considered as the fee for living as a “resident” in the region where we live. The tax is composed of a per-capita burden and 10% rate on income (4% for prefecture and 6% for municipality). Fixed asset tax is a tax for municipalities. It is somewhat similar to rate system here. The tax is imposed on the owner of fixed assets such as land, houses and some business assets. Local government also have corporate income taxes, but there is a regional gap in its revenue base between urban and rural areas. It is one of the challenges for Japanese local governments to build a less imbalanced and more stable local tax system.