The government has pledged to increase investments in local areas with the introduction of the Future Response Fund, but concerns among local governments remain. This is due to the possibility that the local allocation tax, which was expected to rise with increased domestic tax revenue, may decrease during the fund's resource allocation process.
On September 29, the Democratic Party and the government held a meeting at the National Assembly to discuss the Future Response Fund and the reform of the local allocation tax. Park Hong-keun, Minister of the Office for Government Policy Coordination, stated, "Support for local governments will not diminish," and emphasized plans to increase investments to meet local demands.
Local governments had anticipated an expansion of local finances due to the recovery of tax revenues alongside the increase in domestic taxes. However, concerns have arisen that the government's decision to adjust the parameters for calculating the local allocation tax to secure resources for the Future Response Fund may lead to a reduction in the tax allocated to local areas compared to previous calculations.
According to the government's proposal, the local allocation tax is estimated to decrease by approximately 30.5 trillion won nationwide by 2027 compared to the existing method. In Daejeon, the ordinary allocation tax is expected to drop by about 550 billion won. Daejeon Mayor Heo Tae-jeong expressed concerns during the meeting, stating that simply replacing the reduction in allocation tax with specific projects funded by the Future Response Fund could undermine local financial autonomy.
The government's plan to "expand regional investments" has also raised concerns among local governments. While the local allocation tax is classified as a resource that local governments can use autonomously, investments through the Future Response Fund are likely to focus on specific projects, potentially diminishing local autonomy.
The government plans to continue supporting local areas through three major mega-projects and a special account for ultra-wide regions, aimed at fostering regional industrial hubs, nurturing local talent, and establishing special accounts for essential medical services. However, local governments argue that the main issue is the reduction of discretionary resources that can be used for existing projects.
Local governments with lower financial independence and higher reliance on allocation taxes are particularly sensitive to changes in these taxes. Incheon Mayor Park Chan-dae requested that discussions also include adjustments to the allocation tax rate, noting that local governments with lower financial independence are significantly affected by even minor changes. The current allocation tax rate is set at 19.24% of domestic taxes, and there are calls for a return of resources to local areas as tax revenues recover.
A survey conducted by the Korean Economic Association among its members regarding "excess tax revenue and the Future Response Fund" revealed differing opinions on how to maintain local transfer resources while utilizing excess tax revenue for future investments.
Professor Kim Hyun-chul of Yonsei University’s Department of Preventive Medicine emphasized the importance of securing local autonomous resources in the face of challenges such as population decline and local extinction, stating, "The semiconductor boom is likely to be temporary, so we cannot neglect fiscal soundness from a long-term perspective."
Professor Choi Dong-wook of Sangmyung University’s Department of Economics and Finance noted the need to consider that rapid tax revenue increases may not continue indefinitely, suggesting that resources should be prioritized for the Future Response Fund. He added that local transfer resources should also be restructured in line with government policy directions.
* This article has been translated by AI.
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