FUKUDA GAS TAX COMPROMISE FALLS FLAT

C O N F I D E N T I A L TOKYO 000860

SIPDIS

SIPDIS

DEPT FOR EAP/J
DEPT PASS USTR FOR CUTLER AND BEEMAN

E.O. 12958: DECL: 03/28/2013
TAGS: ECON EFIN PGOV JA
SUBJECT: FUKUDA GAS TAX COMPROMISE FALLS FLAT

REF: TOKYO 822

Classified By: A/DCM David F. Davison. Reasons 1.4 (b)(d)


1. (SBU) Summary: Emulating former Prime Minister Koizumi
in facing down powerful interests in his own party, Prime
Minister Fukuda put forward a compromise plan to resolve the
ongoing gasoline tax controversy without securing the
agreement of other Liberal Democratic Party (LDP) leaders.
The opposition Democratic Party of Japan (DPJ) immediately
rejected the proposal. The provisional gas tax is now
certain to expire March 31, at the end of Japan's current
fiscal year. The LDP is seeking DPJ support for a stop-gap
measure to extend the non-road taxes for one month, but
success is uncertain. The Diet is set to approve separate
legislation extending special tariff rate measures also due
to expire March 31. End Summary.


2. (SBU) Prime Minister Fukuda, in a televised press
conference late March 27, announced an 11th-hour compromise
proposal designed to break the month-long Diet logjam over
extension of a provisional 25-yen per liter gasoline tax. If
the Diet fails to act, the provisional tax -- which has been
in effect for more than 30 years -- will expire April 1.
Revenue from the gasoline taxes goes exclusively to road
construction projects and serves as a de facto subsidy for
local government budgets. The opposition DPJ has attacked
the earmarks as an example of wasteful pork-barrel spending
and has called for all gasoline taxes to be incorporated into
general revenues. Former Prime Ministers Koizumi and Abe
each tried and failed to reform the gas tax system, in the
face of virulent opposition from within their own party.


3. (SBU) In return for DPJ agreement to extend all expiring
taxes for FY-2008, Fukuda proposed eliminating the special
road-tax earmarks in FY-2009; overhauling the annual review
of the tax system; eliminating wasteful spending on road
construction; drafting of a new midterm five-year road
construction plan, in place of the current 10-year road plan,
which has been criticized for overspending and wastefulness;
and establishment of a joint committee of the ruling and
opposition parties to decide spending priorities for the
FY-2008 road construction budget.


4. (SBU) Within hours, the opposition DPJ rejected the Prime
Minister's proposal and issued a statement setting out three
principles for resolving the impasse. Party leaders called
for immediate elimination of the road construction earmarks
for FY-2008 and reallocation of the gasoline tax revenue into
local government subsidies, immediate elimination of the
provisional gasoline tax, and abolishing the practice of
"amakudari" through which senior bureaucrats retire into
lucrative jobs in private sector or public corporations
linked to their former ministries.


5. (C) The government is now seeking DPJ support for a
stop-gap measure that would extend the non-road taxes for one
month until the government can use its two-thirds majority to
override Upper House opposition. DPJ leaders March 28
expressed initial opposition to that idea and the DPJ has
submitted its own bill to extend provisional tax measures in
seven categories, including the tax exemptions for overseas
investment accounts, and land transactions, which the
government may latch onto. Late on March 28, MOFA contacts
told us the DPJ has agreed to a March 31 Upper House vote on
separate legislation to extend certain tariff rate
concessions due to expire that day (reftel) so approval of
that legislation now seems assured.


6. (C) Comment: Even if the DPJ had agreed to the Fukuda
compromise, the Prime Minister may have faced a revolt from
within his own ranks on the plan. Now he has alienated a
powerful base of his own party without achieving a
breakthrough with the opposition on the tax measures.
SCHIEFFER