Prime Minister Sanae Takaichi's administration advocates responsible and proactive public finances, focusing on tax system revisions to boost economic growth. Discussions for the fiscal 2026 revision highlight automobile-related taxes, with challenges in offsetting revenue losses. Local government opposition and alignment with decarbonization efforts must also be addressed.
The Liberal Democratic Party's Research Commission on the Tax System, along with the Japan Innovation Party, plans to finalize the ruling coalition's outline for the fiscal 2026 tax revision by mid-December. A key focus is the revision of automobile-related taxes, where the industry seeks to abolish the tax levied based on fuel efficiency at vehicle purchase. This aims to stimulate new car sales amid impacts from U.S. President Donald Trump's tariff policies. However, abolishing the tax would create an annual ¥190 billion shortfall in local tax revenues, prompting opposition from the Internal Affairs and Communications Ministry over potential lacks in funding for roads and infrastructure. The tax also incentivizes fuel-efficient vehicle choices, and its removal could conflict with decarbonization efforts, including the shift to electric vehicles.
The already decided abolition of the provisional gasoline tax surcharge and the corresponding surcharge on diesel oil delivery tax will result in a total revenue loss of ¥1.5 trillion, with ¥1 trillion for the central government and ¥500 billion for local governments. To offset this, the fiscal 2026 revision intends to boost revenues through measures like revising special tax provisions that reduce corporate taxes under certain conditions. It is essential to boldly eliminate projects with limited policy effects and secure alternative funding sources. Concurrently, tax reductions for corporate investments are under consideration as part of the growth strategy, including a proposed tax credit deducting 8% of the investment amount from corporate tax, scaling to about ¥500 billion annually.
Raising the 'annual income barrier,' the income threshold for income tax imposition, is another point of discussion. It was increased from ¥1.03 million to ¥1.6 million in the fiscal 2025 revision. The Democratic Party for the People demands further raising it to ¥1.78 million, but this would cause massive revenue losses and seems unrealistic given Japan's worst fiscal condition among major economies. Itsunori Onodera, chairperson of the LDP's tax commission, suggested a natural approach of raising the threshold in line with price increases, by tens of thousands of yen at a time.