Where Did 1.3 Trillion Yen in Hometown Tax Go? — The Redistribution That Never Reaches 'the Regions'

Japan's Hometown Tax (furusato nozei) donations reached 1.2728 trillion yen in FY2024, marking the fifth consecutive record high. The number of users reached approximately 10.8 million, meaning roughly one in ten Japanese citizens now participates in the system.

But examining the substance behind this "success" reveals a very different picture.

13 Municipalities Above 10 Billion Yen, the Rest Scramble

Only 13 municipalities received more than 10 billion yen in FY2024, representing just 0.8% of Japan's approximately 1,700 municipalities. Shiranuka Town in Hokkaido topped the list at 21.165 billion yen (seafood such as scallops and salmon roe), followed by Izumisano City in Osaka at 18.152 billion yen, and Miyakonojo City in Miyazaki with meat products.

Note: The nominal top recipient in FY2024 was Takarazuka City in Hyogo (25.668 billion yen), but approximately 25.4 billion of this came from a single couple's donation for hospital reconstruction, a case fundamentally different from return-gift competition.

Massive Outflows from Urban Centers

On the other side, urban municipalities face severe tax revenue losses.

Yokohama's resident tax deduction amount (outflow due to donations to other municipalities) was 34.338 billion yen. With incoming donations of only 2.89 billion yen, the city suffered a net deficit of approximately 31.4 billion yen. Nagoya lost roughly 6.1 billion yen (19.8 billion outflow vs 13.7 billion intake), while Osaka's outflow reached 19.2 billion yen.

Tokyo's total outflow was 189.9 billion yen (up 12.5% year-on-year). Tokyo's 23 wards alone lost a combined approximately 93 billion yen, approaching 10% of special ward resident tax. By ward: Setagaya at 11.028 billion, Minato at 8.186 billion, and Ota at 5.631 billion yen.

Ota Ward publicly states that its annual outflow equals "the reconstruction cost of approximately one elementary or junior high school." The ward's FY2024 outflow was 5.631 billion yen, rising to over 6.5 billion yen the following year. Most residents have no idea that their municipality is losing a "school's worth" of revenue each year.

"Gratitude to Hometown" Is a Dead Letter

The original concept proposed by Issei Nishikawa, then-governor of Fukui Prefecture, in 2006 was a "hometown donation tax credit" enabling young people who moved from rural areas to cities to "give back to their hometown."

What is the reality in 2025? According to the Research Institute of Economy, Trade and Industry (RIETI), only 0.5% of donors chose their destination because "the policy or use of funds was good." The vast majority select based on return-gift appeal. "Gratitude to hometown" has become a "return-gift bargain sale."

Tracing Where 1.3 Trillion Yen Goes

The total expense figure for FY2024 was 590.1 billion yen (46.4% of donations). The breakdown is as follows:

• Portal site fees: 165.6 billion yen (13%). Intermediary platforms such as Furusato Choice, Rakuten Furusato Nozei, Satofull, and Furunavi charge 10-15% commission on donations. This was the first year the Ministry disclosed this figure separately.
• Return gift procurement: The legal ceiling is 30% of donations, estimated at approximately 380 billion yen.
• Shipping and administrative costs: Estimated at approximately 44.5 billion yen.

Municipalities' net receipts are 682.2 billion yen (53.6%). When a donor gives 10,000 yen "for the regions," only 5,360 yen actually reaches them. The remaining 4,640 yen goes to intermediaries, gift suppliers, and logistics companies.

Furthermore, NTT Data Management Institute estimates the effective expense ratio may reach 55.6-59.6%, as some costs are categorized as "non-solicitation expenses" excluded from official statistics.

The Zero-Sum Structure

The fundamental problem with Hometown Tax is that it merely transfers tax revenue.

1. A resident of City A donates 10,000 yen to City B.
2. Approximately 9,800 yen is deducted from the resident's municipal tax (self-pay of 2,000 yen).
3. City A loses 9,800 yen in tax revenue.
4. City B receives 10,000 yen but spends 3,000 yen on return gifts plus 1,600-2,000 yen in expenses.
5. City B's net gain is only about 4,000-5,000 yen.

National tax revenue remains unchanged. But expenses (return gifts, portal fees, shipping) represent a net cost to society. Approximately 590 billion yen per year is spent merely to redistribute tax revenue between municipalities.

This "redistribution" is not even equitable. When municipalities lose resident tax revenue, 75% is compensated through local allocation tax for recipient municipalities. The source of this compensation is national tax revenue, meaning all citizens pay, including those who do not use the system.

Meanwhile, non-recipient municipalities such as Tokyo's 23 wards and Kawasaki receive zero compensation. Their outflow becomes a pure fiscal loss. The 23 wards' approximately 93 billion yen outflow in FY2024 is, quite literally, a 93 billion yen loss.

The Regressive Benefit Structure

Hometown Tax deduction limits increase proportionally with income, meaning higher earners can obtain more return gifts at an effective "2,000 yen" self-pay.

• A person earning 3 million yen donating 10,000 yen: net benefit of approximately 1,000 yen (gift value 3,000 yen minus 2,000 yen self-pay).
• A person earning 20 million yen donating 1 million yen: net benefit of approximately 298,000 yen (gift value 500,000 yen minus 2,000 yen self-pay).

Keio University's Professor Takero Doi (public finance) identifies three problems: distortion of inter-regional fiscal equalization, reversal of individual-level redistribution (regressivity), and inefficient loss of tax revenue. He characterizes the system as "completely contrary to the principles of taxation, creating various distortions and inequities."

Regulatory History: Whack-a-Mole

The Ministry of Internal Affairs has repeatedly attempted to regulate the system's distortions.

The 2019 legislation triggered a "last-minute rush" by Izumisano City, which ran an Amazon gift card campaign (up to 32% cashback) from November 2018 to March 2019, amassing over 50 billion yen in a short period. The Ministry excluded five municipalities, but Izumisano sued and the Supreme Court ruled in June 2020 that "retroactive exclusion based on pre-enforcement conduct is illegal."

In Sumoto City, Hyogo Prefecture, irregularities in return gifts led to a two-year exclusion from May 2022. A third-party investigation committee cited "low compliance awareness among the mayor and officials." In December 2024, former officials were charged with embezzlement and fraud.

Each tightened regulation produces new loopholes; each closed loophole generates fresh distortions. As long as the core model of "incentivizing donations through return gifts" persists, this cycle will continue.

"If Local Products Have Value, Why Do They Need to Be Bought Up?"

Urban business strategist Hitoshi Kinoshita has consistently criticized the system. His core argument is straightforward: "If local products truly have value, they should sell in a fair market without subsidies." Hometown Tax is essentially a "state-run catalog" with a 40-50% price subsidy, distorting genuine demand and price signals.

This argument is supported by economic theory. The subsidy creates adverse selection: the less competitive a product, the stronger the incentive to rely on Hometown Tax, delaying genuine industrial development. Administrative resources diverted to return-gift development are taken from policy-making and public services.

Counterarguments exist. Local products face information asymmetry, logistics costs, and brand recognition deficits that prevent fair market competition. Daiwa Research Institute found that "municipalities with the weakest independent revenue bases show the highest economic impact." However, this measures relative effect, not absolute community improvement.

The problem is that the "incubation subsidy" function and the "state-run catalog" reality coexist within the same system. A design that separates the two is what is needed.

Is Abolishing Return Gifts Realistic?

From a public finance standpoint, abolishing return gifts is the correct answer. In December 2023, Shibuya Ward Assembly passed a resolution calling for "fundamental review including abolition." Yet political realities present barriers:

• Political influence of recipient municipalities (especially agricultural and fishing regions)
• Vested interests of approximately 10.8 million users
• Economic interests of the return-gift industry and portal site operators

Abolition would cause donations to plummet, immediately distressing municipalities dependent on Hometown Tax revenue. Even top-tier recipients like Shiranuka Town in Hokkaido would lose funding for childcare support if donation revenue suddenly disappeared. The deeper the dependency, the harder the transition: a classic lock-in structure.

Corporate Hometown Tax and GCF Offer Alternative Paths

Where, then, do realistic improvements lie? Two directions deserve attention.

First, Corporate Hometown Tax (personnel dispatch model). Created in 2020, this system enables corporations to dispatch specialist staff to municipalities alongside donations. Tax credits cover approximately 90% of corporate costs. As of April 2024, 157 personnel had been dispatched to 119 municipalities. No return gifts are involved; the aim is regional problem-solving through knowledge transfer. While small in scale compared to the 1.3 trillion yen individual system, it most closely reflects the original intent.

Second, Government Crowdfunding (GCF). This project-based donation model has clear designated uses and minimal or no return gifts, focusing on policy support. Examples include Hirono Town in Fukushima's hospital preservation project (raising 8.94 million yen against a 2.5 million target) and Kasuga City's station mural project in Fukuoka (achieving 2.6 times the goal). These projects attract donors committed to policy outcomes. While their scale (millions of yen per project) cannot replace 1.3 trillion yen, they represent the form closest to the system's original philosophy.

What the 2026 Regulatory Tightening Really Asks

In October 2026, local product standards will be further tightened, requiring manufactured goods to demonstrate that over half their value derives locally. "Logo-only" return gifts will be eliminated, but this remains a symptomatic treatment.

The fundamental question persists: Is it rational for society to spend 590 billion yen annually on transfer costs for 1.3 trillion yen in tax revenue redistribution? No one has systematically compared this with the alternative of keeping that 590 billion yen in residential municipalities for public services such as childcare, public transit, and healthcare.

The Hometown Tax system continues to provide an incomplete answer to the real problem of regional decline. The 10.8 million users bear no ill intent. But the incentive design itself, "luxury return gifts for a mere 2,000 yen," hollows out the system's purpose.

Monbetsu City in Hokkaido once topped the national intake rankings, yet throughout that period young people continued to leave and the population kept declining. Being "successful" at Hometown Tax does not solve a region's fundamental challenges. Return-gift suppliers and logistics companies prosper, but that is not the same as "the region becoming prosperous."

The question must be reframed. What Hometown Tax should have asked was not "which municipality offers the most attractive return gifts?" but rather "which municipality's policies do I want to direct my tax money toward?" Is it still possible to return to that question? Or has the web of interests spawned by a 1.3 trillion yen market already sealed it shut?

Inspiration for This Article

This article was inspired by the following public commentary, with ISVD conducting its own independent data analysis.

• Hometown Tax, 1.27 trillion yen per year. So, has it made rural Japan any richer? by Hitoshi Kinoshita (April 2026)

Reference Books

• 『本当は恐ろしい「ふるさと納税」─地方交付税が奪われる─』 (The Frightening Truth About "Hometown Tax": How Local Allocation Tax Is Being Stolen) (original: 本当は恐ろしい「ふるさと納税」─地方交付税が奪われる─) by Toshiyasu Ito, Tokyo Tosho Shuppan, 2023: Analyzes the damage to Japan's local allocation tax system from a public finance perspective and argues for abolition.

• 『ふるさと納税の理論と実践』 (Theory and Practice of Hometown Tax) (original: ふるさと納税の理論と実践) by Takaaki Yasuda and Toshiyuki Yasui, Jigyou Kousou Graduate School Publishing, 2017: A comprehensive reference covering the system's design intent and practical case studies, useful for understanding the gap between ideals and reality.

References