I. Introduction

This memorandum exhaustively examines the concept and limitations of the taxation power of Local Government Units (LGUs) under the 1987 Philippine Constitution and the Local Government Code of 1991 (Republic Act No. 7160). The fundamental principle is that while the power of taxation is primarily vested in the Congress, this power is constitutionally delegated to LGUs to ensure their meaningful autonomy. However, this delegated power is not absolute and operates within a well-defined constitutional and statutory framework. This research will delineate the scope of this delegated authority, its constitutional basis, inherent and statutory limitations, and the mechanisms for its exercise and review.

II. Constitutional Foundation of LGU Fiscal Autonomy

The 1987 Constitution explicitly mandates local autonomy. Section 5, Article X provides that “Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy.” This provision is the cornerstone of LGU fiscal power. It establishes a dual grant: a direct constitutional authorization for LGUs to create their own revenue sources, and a recognition of the Congress‘s power to set “guidelines and limitations.” The power of taxation is thus a constitutionally-guaranteed component of local autonomy, not a mere statutory privilege that can be withdrawn at will by the national legislature.

III. Statutory Grant under the Local Government Code

The Local Government Code (LGC) is the operative law that effectuates the constitutional mandate. It embodies the policy of “granting genuine and meaningful local autonomy to enable [LGUs] to attain their fullest development as self-reliant communities” (Section 2(a), LGC). Book II of the LGC specifically details the taxing powers of provinces, cities, municipalities, and barangays. The Code provides both a general grant and specific enumerations. The general grant is found in Section 129, which states that LGUs “shall have the power to levy taxes, fees, and charges not otherwise levied by the national government,” subject to the provisions of the Code. This is supplemented by specific sections listing the common revenue powers (e.g., tax on business, community tax) and the taxing powers peculiar to each LGU level.

IV. The Doctrine of Devolution and Its Implications

The LGC operates on the principle of devolution, which involves the transfer of power, authority, and resources from the national government to LGUs. In the context of taxation, this means the taxing powers are expressly delegated and no longer require a specific charter or special law for an LGU to exercise them, unless otherwise limited. The Supreme Court, in Mactan Cebu International Airport Authority v. Marcos, emphasized that the LGC “withdrew from the national government the power to tax the instrumentalities of local government units” and reinforced LGU autonomy. However, devolution is not decentralization, which merely involves delegation of administrative functions. Devolution grants substantive law-making power, including taxing power, making LGUs partners in national development.

V. Inherent Limitations on the Taxing Power of LGUs

Like the national government, the taxing power of LGUs is subject to inherent limitations arising from the nature of the state and constitutional principles. These are:
Public Purpose*: The levy must be for a public purpose, benefiting the community as a whole.
Non-delegability: While the Congress can constitutionally delegate to LGUs, the LGUs themselves cannot further delegate their taxing power* to other entities.
Territoriality: An LGU can only impose taxes, fees, and charges on persons, property, and activities within its territorial jurisdiction*.
International Comity: LGUs cannot tax instrumentalities* of foreign governments (e.g., embassies) to the extent they are exempted by customary international law or treaty obligations.
Exemption of Government Entities: As a general rule, LGUs cannot tax the national government, its agencies, and instrumentalities. This is rooted in the doctrine of intergovernmental immunity*, intended to prevent the paralysis of government functions. However, this has been significantly tempered by the LGC and jurisprudence.

VI. Express Constitutional and Statutory Limitations

The LGC and related laws impose specific, express limitations on LGU taxing power.
Constitutional Limitations: All constitutional limitations on the national taxing power apply to LGUs, such as the rule of uniformity and equity in taxation (Section 28(1), Article VI), and the prohibition against imprisonment for non-payment of poll tax* (Section 20, Article III).
Statutory Limitations under the LGC*: The LGC contains key prohibitions (Section 133), including but not limited to:
* Income taxes, except on banks and other financial institutions.
* Documentary stamp tax.
Taxes on estates, inheritance, gifts, and intangibles*.
* Customs duties, registration fees of vessels, and taxes on wharfage.
Taxes on the national government, its agencies, and instrumentalities*, except when specifically allowed (e.g., under Section 234, LGC).
* Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fishermen.
Taxes on business enterprises certified by the Board of Investments* as pioneer or non-pioneer for a period of time.
* Taxes on petroleum products (though this has been subject to specific laws like RA 8479).
* Percentage or value-added tax on sales, barters, or exchanges.
Procedural Requirements: The exercise of taxing power must comply with the mandatory procedures under the LGC, including the conduct of public hearings, publication of the tax ordinance, and posting of notices (Sections 187 and 188, LGC). Failure to comply renders the ordinance void*.

VII. Comparative Analysis of Taxing Powers Across LGU Levels

The following table compares the principal taxing powers granted to different levels of LGUs under the LGC, highlighting their scope and limitations.

VIII. Judicial Review and the Tests for Valid LGU Tax Ordinances

The Supreme Court exercises the power of judicial review over LGU tax ordinances. An ordinance may be challenged for being ultra vires (beyond the LGU’s authority), unconstitutional, or unreasonable. The tests applied are:
The Dual Requirement Test: The ordinance must pass two criteria: (1) It must be consistent with the basic policy of local autonomy* as stated in the Constitution and LGC; and (2) It must comply with the specific limitations set by the LGC in Sections 133 and 134.
The Test of Reasonableness: Even if an ordinance is within the statutory grant, it may be struck down if the levy is “unjust, excessive, oppressive, confiscatory, or disproportionate to the costs of regulation or benefits conferred.” This is grounded in the requirement of due process*.
The Strict Construction Rule: Tax exemptions, incentives, or reliefs granted by LGU ordinances are construed strictly against the taxpayer claiming them, as these are considered derogations of the taxing power*.

IX. Significant Jurisprudential Doctrines

National Government Instrumentalities: The case of Basco v. Philippine Amusement and Gaming Corporation established the doctrine of immunity from local taxes for national government instrumentalities. However, the LGC (Section 133(o)) and later cases like Mactan Cebu International Airport Authority have carved out exceptions, allowing LGUs to tax government-owned or controlled corporations* (GOCCs) engaged in proprietary activities, unless a specific law grants them exemption.
Fees vs. Taxes: The Supreme Court distinguishes a tax from a fee. A tax is levied for revenue, while a fee (or service charge) is imposed in the exercise of police power or for regulation, and as compensation for a specific benefit or service. A license fee can have a revenue component, but it must not be excessive. If the primary purpose is revenue generation and the amount is disproportionate to the cost of regulation, it may be deemed a tax subject to the limitations on taxing power*.
Pre-emption by National Law: Where the national law implicitly or explicitly pre-empts a field of taxation, an LGU cannot intrude. For example, the Value-Added Tax law pre-empts the field of indirect taxes on sales, thus prohibiting LGUs from imposing a local value-added tax*.

X. Conclusion

The power of taxation of LGUs is a constitutionally-delegated authority, operationalized by the Local Government Code, intended to fuel local autonomy. It is a broad but not plenary power. Its exercise is circumscribed by inherent constitutional principles, express statutory prohibitions (notably in Section 133 of the LGC), territorial constraints, and procedural mandates. The hierarchy of LGUs dictates a graduated scope of taxing powers, with cities enjoying the widest latitude and barangays the most confined. The judiciary serves as the final arbiter, ensuring that LGU tax ordinances remain within the bounds of the law, are reasonable, and do not contravene national policy or the constitutional framework of intergovernmental relations. The dynamic between LGU fiscal autonomy and national sovereignty continues to evolve through legislative action and judicial interpretation.