The paper specifically considers the inadequate tax powers of local governments and their uneven fiscal capacities as among the major challenges to effective decentralization and public sector governance in the Philippines. While major expenditure functions have been devolved to local governments, the national government continues to have exclusive authority over productive and broad based taxes. Consequently, government resources continue to be centralized, resulting in common pool problems, and local governments remain very dependent on national government transfers and the direct provision of devolved services. This undermines local autonomy and government accountability. The paper concludes by advocating for joint taxation by the national and local governments of productive broad based taxes, such as individual and corporate income taxes, motor vehicle tax, excise taxes, and possibly, the value added tax.