Local governments across Panama are confronting a severe financial crisis as the national government withholds a growing portion of critical tax revenue. Mayors and policy experts warn that extreme centralization is crippling municipal abilities to provide essential community services.
The alarming trend emerged during a detailed analysis of municipal financing on the “Radar” program. Officials revealed that the percentage of Property Tax revenue transferred to municipalities has plummeted from 93 percent to just 39 percent over a four-year period. This dramatic reduction directly impacts garbage collection, school maintenance, and public infrastructure repairs that residents depend on daily.
Shrinking Municipal Budgets
San Miguelito Mayor Irma Hernandez disclosed precise figures showing the financial squeeze. She reported that in 2021, municipalities received $150 million of the $160 million collected in Property Tax revenue. By 2025, that transfer had dropped to only $83 million from $211 million collected.
“Where is that resource staying? The logic is that the government closest to me gives me better responses,” [Translated from Spanish] Hernandez questioned during the program.
This substantial revenue retention comes despite municipalities bearing responsibility for increasingly demanding public services. The situation has forced difficult choices about which community needs can be addressed with shrinking budgets.
Jorge Ricardo Panay of the Association of Municipalities of Panama provided crucial context for the funding struggle. He identified Panama as the most centralized country in Latin America and the seventh most centralized nation worldwide.
“The system in Panama is an extremely centralized system, not only in resources, but in competencies… the Panamanian institutional structure created in 1903 still remains,” [Translated from Spanish] Panay stated.
He further explained that decentralization efforts originally aimed to transform how Panama administered resources by transferring authority to local territories. This approach would theoretically generate more balanced economic development.
Local Governance Under Pressure
Pedasi Mayor Miguel Batista emphasized the unique role municipal governments play in democratic processes. He noted that local administrations conduct citizen consultations within their territories to determine appropriate fund allocation.
Batista criticized the central government for executing major projects like highway construction without consulting local authorities. Municipal leaders possess intimate knowledge of community needs and local conditions that often make national projects ineffective.
He cited a specific case in Mariabe where centrally-planned infrastructure resulted in flooding problems. The current system also requires municipalities with higher real-estate tax collections to support smaller districts through a common fund.
“The true solidarity should come from the Central Government with a fixed contribution from the General State Budget,” [Translated from Spanish] Batista asserted during the discussion.
This arrangement means fifty percent of Property Tax revenue from larger districts gets redirected to this shared pool. Mayors argue the centralizing the goverment should provide equivalent support from national resources instead of redistributing locally-generated taxes.
Alternative Revenue Sources Blocked
The debate highlighted how municipalities remain blocked from accessing other income sources generated within their territories. Several key revenue streams that could alleviate budget pressures continue flowing to national coffers instead.
Tourism tax represents one significant lost opportunity for municipal budgets. This ten percent levy originally functioned as a municipal tax before being transferred to the Tourism Authority and central administration.
Batista expressed particular frustration about this arrangement in his district, which contains premium tourist destinations like Iguana Island and approximately four hundred hotel rooms. Despite generating substantial tourism revenue, Pedasi sees little financial benefit from this economic activity.
Major industries operating within municipal boundaries also contribute minimally to local budgets. Hernandez pointed out that ports, railways, and banking institutions pay no municipal taxes despite using local services extensively. This creates a fundamentally unbalanced system where small businesses bear disproportionate tax burdens.
In San Miguelito, the mayor noted, the weight of taxation falls heavily on individual residents and small commercial operations. Meanwhile, large corporations benefiting from municipal services like security and garbage collection contribute almost nothing to support these functions.
Systemic Reform Demands
Participants unanimously agreed that Panama’s municipal financing system requires urgent restructuring. Their proposed solutions include complete transfer of Property Tax revenue, a fixed percentage of the national budget, and meaningful transfer of administrative competencies.
The current Centralization model creates medium and long term governance risks according to experts. It forces internal migration to an already saturated Panama City by failing to promote balanced territorial development.
Recent statements from national leadership suggest immediate change remains unlikely. President Jose Raul Mulino explicitly rejected reviewing tax policy in Colon province following demands from Mayor Diogenes Galvan.
Similar concerns raised by Panama City Mayor Mayer Mizrachi regarding distribution of the Property Tax have not produced policy adjustments. The continuing standoff leaves municipalities struggling to maintain services while searching for solutions to their worsening financial predicament.