The hometown tax program, designed to help struggling rural communities, left 27 percent of all local governments in the red in fiscal 2021, a study by The Asahi Shimbun showed.

One big problem are the gifts provided in the program, which is known as “furusato nozei” in Japanese.

Under the program, introduced in 2008, people living in urban areas can donate cash to other local governments of their choice.

In return, they receive tax credits in their jurisdictions and thank-you gifts from the local governments that received their donations.

For example, if they donate 50,000 yen ($379) to another local government, they will receive deduction of 48,000 yen from their income and residence taxes the following year.

In addition, they will be sent a gift worth up to 30 percent of the donated sum from the receiving local government. Many of these gifts are local specialties.

The program was intended to allow urban dwellers to support their cash-strapped hometowns or other rural areas hit by depopulation and dwindling tax revenues.

The Asahi study was based on fiscal 2021 figures released in July by the Ministry of Internal Affairs and Communications, which has oversight over the hometown tax program.

The calculations for income and outflow showed that 471, or 27 percent, of the nation’s 1,741 cities, wards, towns and villages were left with deficits under the program.

Fifteen percent of Japan’s towns and villages fell into the red through the program, the study showed.

One likely key reason for this is that donations are concentrated on a handful of local governments that can afford to offer the coveted gifts. Other local governments have not received a sufficient amount of donations to make the program worthwhile.

And expenses to buy, promote and deliver gifts are proving too much for them.

Hideaki Hirata, professor of business management at Hosei University, questioned the rationale for continuing the hometown tax program.

“Under the tax program, local governments are fiercely vying with each other for a piece of the tax revenues, rendering it a zero-sum game,” he said. “Donations are supposed to be used for services to residents in their jurisdictions.”

In fiscal 2021, a record 830.2 billion yen was donated in the program.

The Asahi calculated the balances for the local government by taking into account their increases and decreases in tax revenues, as well as expenses, including those to buy and ship gifts under the program.

The Yokohama city government’s balance was 22.73 billion yen in the red, the worst deficit among the local governments.

It was followed by the Nagoya city government, with 13.04 billion yen in the red, and the Osaka city government, with a deficit of 12.09 billion yen.

As the competition to woo donors has intensified year after year, the ministry in 2019 restricted the expenses for gifts to a maximum 50 percent of the donation amount.

In fiscal 2021, expenses for gifts totaled 385.1 billion yen, or 46.4 percent of the donated sum, almost on par with the levels of the previous two years.

One reason the gift expenses are unlikely to go down is that local governments are increasingly relying on website operators to pitch their gifts to win over donors.

Officials with several local governments said they usually spend about 10 percent of the collected donations for handling fees charged by the website operators.

“Promoting our gifts at websites is indispensable since we cannot gather sufficient donations on our own,” said a local official in western Japan.

One municipality feeling the weight of its gift expenses is Seika, a town of about 36,000 residents in Kyoto Prefecture.

Seika, a commuter town to Osaka and Kyoto, collected 66.29 million yen in donations in fiscal 2021.

But it cost 17.95 million yen to acquire the gifts for donors and an additional 14.12 million yen for delivery expenses, settlement charges and website fees.

That left the town with half of the donations as tax revenue.

But Seika “lost” 147.2 million yen in tax earnings because its own residents donated to other municipal governments under the hometown tax program.

Seika was left with an overall shortfall of 110 million yen, the third largest deficit among towns and villages in the nation.

Like other local governments, however, Seika can receive state grants covering 75 percent of the lost tax revenues, so the town’s final balance sheet is “break-even,” according to a city official.

Municipalities can significantly reduce the rate of the value of the gifts, but that will likely make them less attractive to donors searching for good returns.

Hirata of Hosei University called for an overhaul of the program, saying the current setup favors businesses.

“Local governments spending money to buy local specialties to offer as gifts is acceptable, compared with the large payments to certain companies in urban cities operating websites,” he said. “The whole system of the tax program should be reviewed, including placing a cap on the website charges.”

The Monbetsu city government in Hokkaido posted the largest surplus, with 7.69 billion yen, followed by the Miyakonojo city government in Miyazaki Prefecture, with 7.67 billion yen, and the Nemuro city government in Hokkaido, with 7.28 billion yen.