Government Plan for a 1% Food Tax Cut and Income-Linked Benefits

Against the backdrop of a high net burden rate compared with other countries, Prime Minister Takaichi identified relieving the burden on middle- and low-income households facing inflation and tax and social insurance payments as the most important current issue.

A refundable tax credit will be placed at the center of the policy, while the food and beverage consumption tax cut will serve as a bridge until the full system is introduced. Income-linked benefits are envisioned not as uniform payments, but as a system that assesses tax and social insurance burdens together with cash benefits and adjusts support according to income and other factors.

The government and ruling parties will decide by early August 2026 on a policy including the consumption tax cut and bridge benefits, finalize the framework in September 2026, and aim for the early passage of bills submitted to an extraordinary Diet session.

The Prime Minister indicated an approach that combines broad and rapid burden relief through the tax cut with focused support for people who genuinely need assistance by transitioning to income-linked benefits.

For working people in middle- and low-income households, income-based benefits in addition to the broad effect of the tax cut are expected to increase take-home pay and reduce tax and social insurance burdens. The benefits are also intended to ease work disincentives caused by income thresholds and promote employment.

Businesses handling food and beverages will need to modify their systems for the tax-rate change, while it was explained that reducing the rate to 1% would shorten the modification period compared with reducing it to 0%. Additional support measures are being considered for businesses such as farmers that cannot receive refunds of input tax credits and for the food service industry.

Regarding the increased burden when the tax rate returns to 8%, the government explained that most working people in middle- and low-income households eligible for benefits would receive support exceeding the effect of the tax cut. It will also consider measures, including existing social security programs, to ensure that motivated low-income workers who are ineligible and elderly people who are not working are not left behind.

For local finances, the food and beverage consumption tax cut is said to have a smaller impact than making a resident tax reduction permanent. The government emphasizes restoring the tax rate after two years to maintain the consumption tax as a source of social security funding and secure market confidence and fiscal sustainability.

The system will proceed in three stages. First, starting in April 2027, the consumption tax rate on food and beverages will be reduced to 1% for all income groups and remain at that level for two years. Second, from June 2027 onward, income-linked benefits will be introduced ahead of schedule using income information held by public institutions. Third, from April 2029, the benefits will be fully introduced while the food and beverage tax rate is simultaneously restored to its original 8%.

The full system aims to provide fair benefits based on household circumstances by also identifying the income of high-income spouses and information on dependents aged 16 to 18 relevant to households raising children. Previous benefits were implemented individually while systems and infrastructure were not yet in place, creating challenges such as preparation burdens for local governments and delays before payments.

While assessing tax revenue trends, the government will review expenditures and revenues, examine the feasible fiscal scale and annual bond issuance as it works to steadily reduce the debt-to-GDP ratio, review special tax measures and subsidies, and pursue revenue from special accounts and funds on a zero-based basis. Nontax revenue, including payments from the foreign exchange special account and independent administrative agencies, is approximately JPY 9.0 trillion this fiscal year, while reporters noted that food tax reductions would require funding on the order of JPY 5 trillion annually.

Budget reform will end reliance on supplementary budgets and limit them to measures of genuinely high urgency. Existing inflation-relief budgets will be reviewed in light of the role that income-linked benefits and bridge measures will play in addressing inflation, while annual bond issuance will be managed across both the initial and supplementary budgets.

Measures for farmers and others will be specified during the budget process after assessing the effects of their inability to receive input tax-credit refunds, with past support measures also taken into account. Budgetary measures, including working-capital support, will be considered for the food service industry.

For motivated low-income people who are ineligible for income-linked benefits, the government will consider the necessary measures before full implementation and reach conclusions so that feasible measures can be implemented from fiscal 2029. For elderly people who are not working, it will clarify the relationship with existing systems such as the pension system and reach conclusions by 2030, when the next pension law revision is scheduled.

Regarding the proposal to raise the basic resident tax deduction to JPY 500,000, it was explained that approximately JPY 3 trillion in funding would be required, compared with approximately JPY 1.6 trillion in local-related funding associated with the food and beverage tax cut, and that making the proposal permanent would also make its impact on local finances permanent.

The government will continue considering the future design of the system, including the ideal and final forms of a refundable tax credit that combines benefits and tax credits. It will also promote the spread of systems capable of responding flexibly to tax-rate changes as a new challenge in preparation for future infectious diseases and major disasters.

The government indicated that the bill does not need to include an economic condition clause to continue tax reductions according to economic conditions. It is considering legislating the income-linked benefits.

The government explained that people facing inflation would be more likely to feel the effects early from a consumption tax reduction than from the fixed-amount benefits provided in the past. Meanwhile, the inflation-response child-rearing support payment of JPY 20,000 per child, decided in the supplementary budget at the end of last year, is expected to have its payment start delayed until the end of July 2026 in some municipalities.