Structure of the Hometown Tax Donation Market (Furusato Nozei) and Revenue and Expenditure Structure of Local Governments in Japan

This study analyzes the market structure of the "Hometown Tax Donation (Furusato Nozei) Market" and the revenue and expenditure structure of local governments, while examining the impact of the Ministry of Internal Affairs and Communications (MIC) regulations. To the best of our knowledge, this study is the first to contribute to these analyses. First, an analysis of the market structure showed that the market share of the top 500 local governments in Japan in terms of donation revenue exceeded 80% of the total. Previously, the market share of the top 100 local governments was over 60% but has since declined. The Herfindahl-Hershman index rose sharply in FY 2018 and declined from FY 2019 onwards, due to the MIC regulations. Spearman's rank correlation coefficients also revealed a fixation of the within-class rankings of donation revenue. Fixation was particularly pronounced for the top-ranked local governments, and fluctuations in rankings among classes decreased following the regulations. Second, according to an analysis of the revenue and expenditure structures of local governments based on an economic behavior model, the composition ratio of revenue and expenditure obtained from the contribution decomposition stabilized after 2019, the year after the regulations were introduced. The correlation coefficients for the donation price and quantity of reciprocal gifts, and for the marginal cost and quantity of reciprocal gifts were both negative, which is consistent with the theoretical results of the economic behavior model. The MIC regulations have had some success in curbing competition for reciprocal gifts by maintaining a certain proportion of the revenue and expenditure of local governments and have prevented the overall monopolization of the market; however, they have also fixed the market structure of the hometown tax donation market. The upper classes are becoming particularly fixed, and local governments in the highest class are engaged in fierce competition over donation prices.