Basco vs. PAGCOR

A statute creating a government-owned and controlled corporation to centralize and regulate all games of chance is a valid exercise of police power, and its provision exempting the corporation from local taxes does not violate the principle of local autonomy, as the taxing power of local governments is always subject to the limitations and control of Congress.

The Philippine Amusements and Gaming Corporation (PAGCOR) was created and granted a franchise under various presidential decrees to establish, operate, and maintain gambling casinos. P.D. No. 1869 was enacted to centralize and integrate all games of chance under one government-controlled entity, with the stated objectives of generating revenue for public projects, improving tourist attractions, and minimizing evils associated with gambling. The petitioners challenged the decree's validity.

• Creation and Purpose of PAGCOR: PAGCOR was created by P.D. No. 1067-A and granted a franchise under P.D. No. 1067-B to operate casinos. P.D. No. 1869 later consolidated its charter to enable the government to regulate and centralize all authorized games of chance, aiming to generate revenue, enhance tourism, and curb gambling-related corruption.
• Petitioners' Challenge: The petitioners, as taxpayers and lawyers, filed a petition arguing that P.D. No. 1869 was null and void for being contrary to morals, public policy, and order. They specifically contended that it waived the City of Manila's right to impose taxes (violating local autonomy), violated the equal protection clause by legalizing PAGCOR gambling while outlawing others, and contravened constitutional policies on social justice, the family, and youth.
• Government's Position: The respondent, PAGCOR, defended the law as a valid exercise of police power. It highlighted that PAGCOR was a major source of government revenue, remitting billions of pesos for socio-economic projects and employing thousands.

• Local Autonomy and Taxation: Petitioners argued that the tax exemption in Section 13(2) of P.D. 1869 constituted an unconstitutional waiver of the City of Manila's right to impose local taxes and license fees, thereby intruding on constitutionally enshrined local autonomy.
• Equal Protection: Petitioners maintained that the law violated the equal protection clause by legalizing gambling conducted by PAGCOR while most other forms of gambling remained outlawed.
• Contravention of State Policies: Petitioners contended that the decree ran counter to the avowed government trend away from monopolies and crony economy toward free enterprise and privatization, and violated constitutional principles on personal dignity, the family, the role of youth, social justice, and educational values.

• Exercise of Police Power: Respondent countered that P.D. 1869 was enacted pursuant to the state's police power to regulate and centralize gambling for the general welfare, generating much-needed revenue and subjecting the activity to government control to minimize associated evils.
• No Violation of Local Autonomy: Respondent argued that the City of Manila, as a municipal corporation, has no inherent power to tax, and its authority is subject to legislative control. Congress had already revoked local governments' power to license gambling via P.D. No. 771, vesting it exclusively in the national government.
• Validity of Classification: Respondent asserted that the law did not violate equal protection, as the legislature may validly classify subjects for different treatment, and legalizing government-regulated gambling while prohibiting other forms is a reasonable classification.

• Local Autonomy and Taxation: Whether the tax exemption granted to PAGCOR under P.D. 1869 violates the constitutional principle of local autonomy.
• Equal Protection: Whether P.D. 1869 violates the equal protection clause by legalizing PAGCOR-operated gambling while prohibiting other forms of gambling.
• Constitutional Policy: Whether P.D. 1869 is unconstitutional for being contrary to morals, public policy, and the state policies enshrined in the 1987 Constitution.

• Local Autonomy and Taxation: The tax exemption does not violate local autonomy. The power of local governments to tax is not inherent and is always subject to the limitations and control of Congress. The national government had already withdrawn local authority over gambling licenses via P.D. No. 771. Furthermore, PAGCOR, as a government instrumentality exercising regulatory functions, is exempt from local taxation under the doctrine of intergovernmental tax immunity.
• Equal Protection: The law does not violate the equal protection clause. The constitutional guarantee does not require that all persons or things be treated identically. The legislature may validly classify, and the classification of government-regulated gambling as distinct from other prohibited forms is not arbitrary or unreasonable, as it is based on the purpose of generating public revenue and minimizing corruption.
• Constitutional Policy: The petitioners failed to demonstrate a clear and unequivocal breach of the Constitution. The cited constitutional provisions (Art. II, Secs. 11, 12, 13; Art. XIII, Sec. 1; Art. XIV, Sec. 2) are merely statements of principles and policies that are not self-executing; they require implementing legislation. The wisdom, morality, or expediency of the law is a political question for Congress, not the judiciary, to decide.

• Police Power — The inherent power of the state to enact legislation that may interfere with personal liberty or property in order to promote the general welfare. The Court held that P.D. 1869 was a valid exercise of police power, as its objective to centralize and regulate gambling to generate revenue and curb associated evils served the public interest.
• Intergovernmental Tax Immunity — Instrumentalities of the national government are generally exempt from local taxation to prevent local governments from impeding or burdening national government functions. The Court applied this doctrine to exempt PAGCOR, a government-owned and controlled corporation with regulatory functions, from local taxes.
• Presumption of Constitutionality — Every statute carries a presumption of validity. The burden lies on the party challenging the law to demonstrate a clear and unequivocal breach of the Constitution beyond a reasonable doubt. The petitioners failed to overcome this presumption.

• "The power to tax which was called by Justice Marshall as the 'power to destroy' cannot be allowed to defeat an instrumentality or creation of the very entity which has the inherent power to wield it." — This passage underscores the rationale for exempting national government instrumentalities like PAGCOR from local taxation.
• "The judiciary does not settle policy issues. The Court can only declare what the law is and not what the law should be." — This statement delineates the separation of powers, affirming that the wisdom of legislation is a political question for the political branches of government.

• Lozano v. Martinez, 146 SCRA 323 — Cited for the principle that the constitutionality of a law must be presumed and that the Court must wield the power to nullify a statute only when it clearly oversteps constitutional limits.
• Victoriano v. Elizalde Rope Workers' Union, 59 SCRA 54 — Cited for the established principle that all presumptions are indulged in favor of a statute's constitutionality, and the burden to prove invalidity beyond a reasonable doubt rests on the challenger.
• Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 — Cited to justify the Court's decision to brush aside technicalities of procedure (like locus standi) due to the transcendental importance of the constitutional questions raised.

• Section 13(2), P.D. No. 1869 — The tax exemption provision stating that PAGCOR shall pay only a 5% franchise tax on gross revenues in lieu of all other national and local taxes. The Court upheld this as a valid legislative grant consistent with Congress's control over local government taxing powers.
• Article X, Section 5, 1987 Constitution — Provides that the power of local governments to create their own sources of revenue and levy taxes is subject to such guidelines and limitations as Congress may provide. The Court cited this to affirm that local autonomy does not make local governments sovereign and that their taxing power remains subject to legislative control.
• P.D. No. 771 — Revoked the authority of local governments to issue licenses or permits for gambling, vesting it exclusively in the national government. The Court relied on this to show that the City of Manila's power to tax gambling had already been withdrawn.

Chief Justice Fernan, Justices Narvasa, Gutierrez, Jr., Cruz, Feliciano, Gancayco, Bidin, Sarmiento, Griño-Aquino, Medialdea, Regalado, and Davide, Jr. concurred with the majority opinion penned by Justice Paras.

• Justice Padilla — Concurred in the result but wrote separately to express his moral opposition to gambling. He argued that gambling is inherently immoral and destructive to Filipino moral character, family life, and national development. He contended that the government's engagement in gambling undermines its moral standing against illegal gambling and suggested that the legislative and executive departments should outlaw all forms of gambling as a fundamental state policy.