Exploratory Analysis of the Correlation between Local Income and Internal Revenue Allotment: Focus on Municipalities that Converted to Cities from 1994 to 2009

Abstract

This study seeks to explore the correlation between internal revenue allotment (IRA), on one hand, and local income generation on the other. It builds on, and seeks to contribute to, the existing literature that describes the dynamics between the level of IRA receipts of a local government unit (LGU) and the level of income it generates internally through local revenue measures and efforts. Specifically, this study seeks to weigh in on the still-unresolved debate on whether IRA has a stimulative effect or a substitutive effect on an LGU’s local income.The units of analysis used in this study are municipalities that have converted to cities from 1994 to 2009, during which period a new regime of central-to-local fiscal transfer, as embodied in the IRA system, was adopted under Republic Act No. 7160 or the Local Government Code of 1991 (LGC).Since conversion to cityhood carries with it an immediate and very significant increase in IRA receipts for an LGU, the conversion can be considered a naturally-occurring “intervention.” By isolating and analyzing local income trends prior to and after the said “intervention,” inferences can be drawn as to how an LGU’s local income-generation efforts correlate with changes in the amount of IRA it receives. The findings of this study can contribute to the on-going theoretical and empirical debate between the adherents of the “substitutive effect” and the “stimulative effect” hypotheses. Ultimately, this study aims to provide additional insight on how the system of central-to-local fiscal transfers in the country should be configured for optimal public benefit.