[Why&Next] Converting 27 Trillion Won in National Taxes to Local Taxes... "Let's Achieve the 7:3 Ratio in the First Half," Local Governments Grow Anxious

Four Closed-Door Meetings Led by the Office for Government Policy Coordination
Local Governments Press for "Urgent Need to Secure Fiscal Autonomy"
Presidential Committee for the Era of Local Autonomy Backs Effort with Related Research

The government is actively moving to implement one of President Lee Jaemyung's policy pledges: raising the national tax-to-local tax ratio to 7:3. An inter-ministerial task force (TF) has held four closed-door meetings so far, working behind the scenes to coordinate the plan. Local governments, including the Korea Association of Province Governors, are strongly urging the swift announcement of a roadmap, declaring that "it can no longer be delayed," while the Presidential Commission for Local Era is supporting the initiative with relevant research.

The four major regional councils that held a forum on fiscal decentralization on the 17th: The Korea Association of Province Governors.

Inter-ministerial Task Force in Operation, but Local Governments Grow Impatient... Will the Roadmap Be Released in the First Half?

According to relevant ministries on March 26, the Office for Government Policy Coordination is leading the 'Inter-ministerial Fiscal Decentralization TF,' which launched in January and includes director-level officials from the Ministry of Economy and Finance, Ministry of the Interior and Safety, Ministry of Education, the Budget Office, and private sector experts. This confidential task force is discussing ways to increase the share of local taxes to 30% by transferring portions of major national taxes—such as value-added tax, income tax, and corporate tax—to local governments. Changle Yoon, the head of the Office for Government Policy Coordination, previously stated that "the goal is to reach a conclusion within the first half of this year."

As of 2024, the ratio of national taxes to local taxes stands at 74.7% to 25.3%. In reality, however, local governments are responsible for about 60% of final expenditures. Aligned with the central government's actions, local governments are raising their voices. They are seeking to achieve "fiscal autonomy" and break free from their current "fiscal dependency," which relies heavily on grants and subsidies. There is also growing discontent that, even if a region successfully attracts businesses, most of the increased tax revenue (such as corporate tax) is claimed by the central government as national taxes.

The four major regional councils—including the Korea Association of Province Governors—recently issued a joint statement, urging prompt implementation of the national policy agenda by insisting, "The 7:3 structure must be realized." To achieve this 7:3 ratio, about 27 trillion won in national taxes would need to be converted to local taxes, based on the average over the past three years. The reform of the national-to-local tax ratio is a continuation of the 'Stage 1 and 2 Fiscal Decentralization' efforts pursued by the Moon Jae-in administration. At that time, the local consumption tax rate was gradually increased from 11% in 2019 to 25.3% in 2023, which raised the local tax share from the low 20% range to about 25%. However, under the Yoon Suk Yeol administration, there has been no further progress, and the ratio has stagnated within a narrow range.

Central Government Holds the Purse Strings... Securing Local Autonomy Is Key

The Presidential Commission for Local Era recently supported the initiative by providing policy grounds through a research report commissioned from the Korean Association for Local Public Finance. The report analyzed that the local tax share could reach 30% if the local consumption tax rate is raised by 12.2 percentage points and the local income tax rate by 4.2 percentage points. However, as the decrease in national tax revenue would result in a reduction in local allocation grants, some regions could actually see a decline in resources. Therefore, the report proposed an integrated model that combines: ▲ allocating 40% of the increased local consumption tax revenue to basic local governments first, and ▲ raising the fixed-rate allocation grant from 19.24% to 26.03%. In this case, the net increase in local government finances is projected to reach about 20 trillion won.

Im Sangsoo, professor of economics at Chosun University and lead author of the report, stated, "Fiscal decentralization is not simply about changing where resources are located; it is a qualitative shift from a centrally controlled structure to a locally driven, autonomous management system." He added, "For genuine local autonomy, the proportion of resources that local governments can freely use, without strings attached as central government subsidies, must be increased." He also emphasized, "To prevent any specific region from suffering losses, safety measures must be put in place to ensure that the reform succeeds without failure."

However, it appears that the process of adjusting the national-to-local tax ratio will not proceed smoothly. Any increase in local tax share due to the adjustment of revenue proportions means a corresponding decrease in national tax revenue. A representative from one of the local councils commented, "It took 10 years just to move the national-to-local tax ratio from 8:2 to the current 7.5:2.5," adding, "The fact that the Lee Jaemyung administration has set 7:3 as a policy goal seems to reflect its belief in the feasibility of the plan." The official continued, "In the past, the Ministry of Finance has taken a defensive stance to avoid losing fiscal leadership, which is a concern. However, since the President has experience as both mayor of Seongnam and governor of Gyeonggi Province, there is a belief that he fully understands the realities of local governments and that adjustments to the national-to-local tax ratio will indeed be made." In response, a government official stated, "While there may be differences in the specific methodologies among ministries, we are actively participating in meetings with the goal of achieving the policy agenda."

This content was produced with the assistance of AI translation services.