One of the reasons why countries provide local governments with intergovernmental fiscal transfers is to compensate for intergovernmental externalities. For instance, in many countries, people born in rural areas often move to urban areas when entering university or starting jobs. Although these residents used the local public services provided by their rural hometown while growing up, when they become part of the national labor force, they often pay most of their taxes to the urban areas where they relocate.
Unless the externalities associated with such a rural-to-urban ‘brain drain’ is corrected by a higher-level government–for instance, by setting uniform educational standards and by providing intergovernmental funding for local public education–rural local governments would have an incentive to provide a suboptimal level of public education. As a result, virtually all countries that rely on local governments to deliver public education provide substantial intergovernmental fiscal transfers to ensure equitable funding of local public education.
In order to further help the fiscal imbalance resulting from the population shift from rural to urban areas, Japan’s Furusato Nozei (Hometown Tax Donation) system goes well beyond a traditional intergovernmental fiscal transfer. Launched in 2008, this initiative was designed to address the growing fiscal and demographic disparities between Japan’s urban centers and its rural peripheries. But what began as a well-intentioned mechanism for redistributive solidarity has evolved into a fiercely competitive marketplace—one where municipalities vie for donor favor with increasingly lavish gifts, raising questions about efficiency, equity, and the very nature of local autonomy.
The Origins and Mechanics of Furusato Nozei
The Furusato Nozei program allows taxpayers in Japan to redirect a portion of their income and residential taxes to a municipality of their choice—typically one they feel a personal connection to, such as their hometown or a rural area in need of support. In return, donors receive a tax deduction and a “thank-you” gift from the recipient municipality, often in the form of local specialties like wagyu beef, rice, sake, or even high-end electronics.
The program’s appeal is twofold: it empowers individuals to support regions they care about, and it provides struggling municipalities with a new revenue stream outside the traditional intergovernmental transfer system. In theory, it’s a win-win. But in practice, the system has triggered a race to the bottom, as local governments compete to outdo one another with ever more enticing gifts.
According to a recent study by Ogawa and Kondoh (2024), as well as an earlier study by Fukasawa, Fukasawa and Ogawa (2019), Japanese municipalities—facing intense competition for donations—tend to offer gifts whose value approaches or even exceeds 30% of the donation amount. This “return rate” has become a key metric in donor decision-making, effectively transforming the program into a quasi-marketplace where consumer logic trumps civic sentiment.
The consequences are significant. The researchers estimate that net revenue from the program is 10.4% to 12.1% lower than it would be in a scenario without such competition. In other words, a substantial portion of the donations is being diverted into gift procurement and shipping costs, rather than being used for local public services or infrastructure. Moreover, the competition has led to distortions in local governance priorities. Municipalities are incentivized to invest in gift logistics and marketing strategies rather than long-term development planning.
Winners, Losers, and Policy Tensions
Not all municipalities benefit equally from the Furusato Nozei system. Wealthier or more media-savvy localities with attractive products or tourism appeal tend to dominate the donation charts. Conversely, smaller or less well-known municipalities—often the very communities the program was meant to support—struggle to attract attention.
This uneven playing field has sparked criticism from urban governments, particularly Tokyo, which loses significant tax revenue each year as residents redirect their payments elsewhere. In response, the central government has introduced regulatory caps on gift values and tightened eligibility criteria for municipalities. Yet enforcement remains patchy, and the incentive to bend the rules persist.
The program also raises broader questions about the role of intergovernmental transfers in a decentralized system. Should local governments be allowed to compete for tax revenue in this way? Does the program undermine the equity goals of Japan’s national equalization system? And what does it mean for democratic accountability when local budgets are shaped more by donor preferences than by resident needs?
Conclusions and implications
The Furusato Nozei program is uniquely Japanese in its cultural framing and administrative design. Nonetheless, it reflects a global trend toward fiscal decentralization and place-based philanthropy. What sets Furusato Nozei apart, however, is its hybrid nature: part tax policy, part crowdfunding platform, part loyalty program. As such, it blurs the boundaries between citizen, consumer, and taxpayer—offering a glimpse into the future of public finance in an era of personalization and choice.
The Furusato Nozei program thus offers a fascinating case study in the unintended consequences of intergovernmental competition. It reveals how well-meaning policies can morph under the pressures of market logic and local ambition—and how the pursuit of fiscal autonomy can sometimes come at the cost of collective equity.
While the Furusato Nozei program began as a heartfelt attempt to reconnect citizens with their hometowns and revitalize rural communities, in the crucible of intergovernmental competition, it has become something more complex—and more contested. As other countries grapple with similar challenges of regional inequality and fiscal innovation, the Japanese experience offers both cautionary lessons and creative inspiration.
Read the complete studies:
Eiji Fukasawa, Takeshi Fukasawa, and Hikaru Ogawa. 2019. Intergovernmental Competition for Donations : The Case of the Furusato Nozei Program in Japan. CIRJE Discussion Paper CIRJE-F-1129.
Akinobu Ogawa and Haruo Kondoh. 2024. How Does Intergovernmental Competition through the Hometown Tax Donation System Affect Local Government Efficiency? MPRA Paper No. 121688. Online at https://mpra.ub.uni-muenchen.de/121688/
