Osaka High Court Declares Central Government's Tax Grant Cut to Izumisano Illegal

High Court Upholds Ruling Against State

Osaka, Japan – The Osaka High Court on Thursday, October 9, 2025, upheld a lower court ruling, declaring the central government's decision to cut special tax grants to Izumisano city as illegal. Presiding Judge Kenji Maki dismissed an appeal filed by the central government, marking a significant legal victory for the western Japan municipality.

Background: The Furusato Nozei System and Grant Reductions

The dispute originated from Izumisano city's highly successful participation in the 'furusato nozei' (hometown tax donation) system. This program allows taxpayers to donate to local governments of their choice and receive tax breaks, often accompanied by return gifts from the recipient municipalities.

In fiscal 2018, Izumisano city garnered approximately 49.8 billion yen in donations, making it the largest recipient among Japan's local governments. The city was known for its aggressive campaigns, which included offering high-value goods and Amazon gift cards as return incentives. In response to concerns over such practices and the escalating competition for donations, the central government implemented a revised internal affairs ministry ordinance. This ordinance factored donation revenues into the calculation of special tax grants.

Consequently, Izumisano's special grants for fiscal 2019 were drastically reduced by 89% from the previous year, amounting to approximately 53 million yen, excluding disaster-related funds. Izumisano city initiated legal proceedings in 2020, seeking the nullification of this grant reduction decision.

A Protracted Legal Battle

The case has navigated through several judicial levels:

• In 2022, the Osaka District Court sided with Izumisano city, deeming the central government's decision illegal.
• However, in 2023, the High Court initially overturned this decision, asserting that disputes between administrative entities were not subject to judicial review.
• The legal trajectory shifted in February 2025 when the Supreme Court dismissed the 2023 High Court ruling. The Supreme Court remanded the case, clarifying that the dispute involved specific rights and obligations, thus making it subject to court examination.

Court's Reasoning: Beyond Legal Authority

In his ruling, Judge Kenji Maki articulated that the local tax grants law, which governs the determination of special grants based on 'typical revenue,' does not consider donations as part of this typical revenue. He concluded that reducing the grants to Izumisano city on the grounds of its donation revenue exceeded the scope of authority granted by the law, rendering the action illegal.

Judge Maki further emphasized that if donation revenue were to be utilized as a criterion for reducing special tax grants, such a decision would necessitate a legislative determination from political and policy standpoints.