As local finances continue to deteriorate, the government is pushing to increase local transfer tax rates and adjust the ratio of national to local taxes to 70-30. However, the specific increase in transfer tax rates and the timeline for implementation have yet to be determined. Concerns were raised in the National Assembly about the potential reduction in funding for local transfer taxes during the establishment of the Future Response Fund.
During the National Assembly's audit of the Ministry of Strategy and Finance on October 8, discussions focused on measures to enhance local finances.
Democratic Party lawmaker Jeong Tae-ho referenced the government's national task of expanding local financial autonomy and revitalizing regional economies, inquiring about plans to raise local transfer tax rates. The government aims to adjust the ratio of national and local taxes to 70-30 and increase local transfer tax rates. To facilitate this, a task force for national and local financial decentralization has been established to discuss medium- to long-term projects with relevant ministries.
Jeong pointed out that local finances are already in decline. Due to a decrease in national tax revenue, local transfer taxes are expected to drop, resulting in a loss of approximately 15.5 trillion won over two years, with about 11 trillion won in 2023 and 4.4 trillion won in 2024. The local financial independence rate has fallen from 46.8% in 2022 to 41.8% this year, while the financial autonomy rate has decreased from 56.6% to 51.1%. Additionally, local debt is projected to increase by 16.4% from 2022 to 2025.
He stated, "Local finances are in crisis, and we need a policy direction that will provide support to supplement local finances. It is necessary to financially compensate for the revenue shortfalls in 2023 and 2024, and additional tax revenue should be allocated more to local governments."
The impact of the Future Response Fund on local transfer taxes also became a contentious issue. Jeong noted that if the existing formula is applied, local transfer taxes would amount to about 97 trillion won, but if funds are diverted to the Future Response Fund, this would decrease to approximately 67.6 trillion won, creating a gap of about 31 trillion won.
In response, the Minister of Strategy and Finance acknowledged that the figures are based on calculations from the formula but emphasized that one should not simply compare the scale of transfer taxes for this year and next year. The Future Response Fund is intended as a financial stabilization mechanism to accumulate resources during periods of tax revenue surplus and to respond to fluctuations in tax revenue for future investments.
Minister Park stated, "This is not a matter of comparing just this year and next year. The idea is to accumulate funds during periods of tax revenue growth to secure resources for potential future downturns in tax revenue." He emphasized that the Future Response Fund would help buffer financial volatility and enable stable financial management.
The government anticipates that next year's local transfer tax will increase by 11.3% to 77.2 trillion won compared to this year. Additionally, it stated that it is difficult to assess the allocation of resources between central and local governments based solely on the ratio of national and local taxes, as local governments have various other transfer resources in addition to local transfer taxes. However, the government shares the direction of increasing local transfer tax rates as outlined in the national task, with specific increases and timelines to be determined through discussions within the task force.
* This article has been translated by AI.
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