Understanding of the Local Tax System and its Current Status
23 August 2018
Property & Consumption Tax Division of the Estimates and Tax Analysis Department
Amid discussions on reinforcing local fiscal decentralization, this report reviews the current status of the local taxation system, which is the foundation of local fiscal revenue based on the characteristics of tax sources and the methods of utilizing tax base between the local and central government, reviewing them in conjunction with major overseas examples from nations such as the US, Japan and Germany while providing an introduction to the local tax exemption system.
Local taxes are key financial sources for municipal governments as they enable local governments to independently source and spend resources. The Korean local tax system initially started out in the form of a piggyback tax on top of the national tax, sharing tax sources with the central government. Later on, however, the current system took root through the tax system reform that was pursued as part of the economic development plan in the 1960s and 1970s as well as urbanization. Key changes include the development of the property tax system which took effect in 1970 to play a role as a policy measure to control the real estate market, the introduction of local consumption tax in 2010 and the local income tax becoming an independent tax item in 2014.
The proportion of local tax is 23.3% of the total tax based on the 2017 tentative accounts settlement, and local tax revenues reached 80.4 trillion Korean won in 2017, 4.3 times higher than the 18.5 trillion won collected in 1997. The Korean local tax as of 2016 is 23.7% of the total tax, which is somewhat higher than the OECD average of 20.2%, making it the 8th highest rate among the 26 OECD unitary states.
When categorizing the 11 types of local tax items by subject, as of the 2018 budget, they consisted of 41.6 trillion won in property tax (53.4%), 14.2 trillion won in income tax (18.2%) and 11.4 trillion won in consumption tax (14.7%). As such, the Korean local tax sources are relatively more diverse compared to those in other OECD countries. When categorizing local tax based on the methods of utilizing tax base between the local and central governments, 61.6% of local tax came from tax bases independent of the central government, and 38.4% of tax revenue came from shared tax bases. By region, about 55% of the total local tax revenue came from the metropolitan area, and by each level of local government, all basic local governments and provincial-level local governments collected at least 50% of their taxes through property taxes.
As for local tax expenditures, 12.9 trillion won in tax revenue was exempted in 2016, making local tax exemption rate at 14.6%. In terms of tax revenue sources, at least 80% was cut through property tax breaks as of 2016, and in terms of utilization methods of tax sources, 85.4% of the tax expenditures was from tax bases independent of the central government.
This report also illustrates different methods of securing local tax base through the examples of three major countries: A state-specific consumption tax management of the US, in which the federal government and local governments have separate tax bases; an example of common tax in Germany, in which the federal and local governments have a shared tax base; and the non-statutory tax system of Japan, in which the local government independently creates new tax bases under the principle of taxation sovereignty.