3. Finance of Local Government

3-1. Revenue Structure 3-2. Revenues from Own Sources 3-3. Transfers from Central Government

Revenue Structure

From Own Sources - Local Taxes - Non-Tax Revenues Transfers from Central Government - Local Shared Taxes (except for autonomous districts) - National Subsidies - Local Transfer Funds (up to 2004) - National Balanced Development Special Account (since 2005) Local Borrowing Transfers from Upper-level to Lower-level Local Governments - Metropolitan Subsidies and Provincial Subsidies - Adjustment Grants (only for autonomous districts)

Revenue Structure

From Own Sources Local taxes Nontax revenues Fiscal Transfers Local shared taxes National subsidies Local transfer funds Local Borrowing TOTAL (trillion won) 2000 61% 31% 30% 34% 13% 15% 6% 5% 65 2001 60% 32% 28% 36% 16% 14% 6% 5% 79 2002 59% 31% 28% 37% 14% 18% 5% 4% 91 2003 62% 31% 31% 35% 15% 15% 5% 3% 98 2004 65% 34% 31% 33% 15% 14% 4% 3% 99 2005 63% 33% 30% 34% 18% 16% NA 3% 107

Revenues from Own Sources

Local Taxes (until 2010) Income Tax - Resident Tax (income part), Farmland Income Tax Consumption Tax - Tobacco Consumption Tax, Butchery Tax, Leisure Tax, Local Driving Tax Property Tax - Acquisition Tax, Registration Tax, License Tax, Property Tax, Automobile Tax, Urban Planning Tax, Common Facilities Tax, Business Office Tax Other Tax - Resident Tax (household part), Regional Development Tax, Local Education Tax

Revenues from Own Sources

Local Taxes (Since 2011) Income Tax - Local Income Tax Consumption Tax - Local Consumption Tax, Tobacco Consumption Tax, Leisure Tax Property Tax - Acquisition Tax, Registration & License Tax, Property Tax, Automobile Tax, Resident Tax(business office part), Other Tax - Resident Tax(household part), Regional Resource & Facility Tax, Local Education Tax

Revenues from Own Sources

Local Taxes (until 2010) Autonomous District Tax License Tax Property Tax Business Office Tax Registration Tax Acquisition Tax Leisure Tax Common Facilities Tax Regional Development Tax Local Education Tax Resident Tax Automobile Tax Local Driving Tax Farmland Income Tax Butchery Tax Tobacco Consumption Tax Urban Planning Tax Province Tax City/County Tax

Revenues from Own Sources

Local Taxes (Since 2011) Autonomous District Tax Registration & License Tax Local Consumption Tax Acquisition Tax Leisure Tax Regional Resource & Facility Tax Local Education Tax Property Tax* Resident Tax Automobile Tax Local Income Tax Tobacco Consumption Tax Province Tax City/County Tax

Revenues from Own Sources

Non-Tax Revenues Current non-tax revenues Temporary non-tax revenues Methods used for raising non-tax revenues - utilization of profit-creating businesses - local public enterprises (corporations) - public land development - price rationalization of fees and charges Local Borrowing Local Bonds/ Borrowing both domestically and abroad Must obtain consent from the Ministry of Public Administration and Security if exceeding limits

Transfers from Central Governments

Local Shared Taxes Local Shared Taxes - Supplementing local fiscal resources and equalizing local fiscal capabilities - general grant: general discretionary purpose “money without string” - 19.24% of domestic tax revenues 1983 2000 2004 2005 13.27% 15% 18.3% 19.13% General Shared Tax : 96% - Allocated by Formula, Standard Financial Demand – Standard Tax Revenue Special Shared Tax : 4% - Allocated on the basis of special local needs, i.e

., Natural disaster Since 2006 19.24%

Transfers from Central Governments

National Subsidies National Subsidies - specific grant, “money with strings” - Encourage local governments to undertake certain projects favored by the central government - provide financial assistance for special or unusual occasions (trillion won) National subsidy (A) Total transfers (B) A/B 1991 2.0

13.1

15.3% 1995 3.9

22.4

17.4% 1997 5.9

30.6

19.3% 1999 8.6

31.6

27.2% 2001 10.6

46.1

23.0% 2003 12.1

53.2

22.7%

Transfers from Central Governments

Regional Development Special Account Since 2005 Regional Development Special Account - Block Grant - Promoting the revitalization of depressed areas - Developing local culture, art, and tourism - Strategic development of regional industry clusters Revenue Sources - Proceeds from liquor tax revenues - Transfers from several special accounts such as rural restructuring, environmental improvement, and land management (originally national subsidies)

Transfers from Central Governments

Local Transfer Funds Local Transfer Funds - To secure more balanced regional development - To serve as a supplement to local fiscal resources Revenue Sources - liquor tax, transportation tax, rural development tax 2000 2001 2002 2003 2004 Road maintenance Agricultural & fishery area development Water pollution prevention Youth support Local development TOTAL (trillion won) 48% 8% 25% 1% 17% 3.7

48% 8% 26% 1% 18% 4.8

39% 9% 33% 1% 18% 4.3

40% 9% 32% 1% 19% 4.9

44% 8% 31% 1% 17% 4.4

Transfers from Central Governments

Transfers from Upper-Level to Lower-Level Gov’t Metropolitan and Provincial Subsidies - To strengthen the connection between upper-level local governments and specific projects at the lower-level local governments - Similar to National Subsidies Adjustment Grant - Revenue sharing program between metropolitan cities and their own autonomous districts - Similar to Local Shared Taxes - Revenue sources: Acquisition Tax and Registration Tax Contribution rates vary depending on each metropolitan city’s ordinances.

4. Intergovernmental Relations

4-1. Vertical Fiscal Imbalance 4-2. Horizontal Fiscal Imbalance 4-3. Intergovernmental Relations

Vertical Fiscal Imbalance

Year 2000 2001 2002 2003 2004 2005 2006 Central Government Amount (trillion Won) 124 % of GDP 21.4

137 145 22.1

21.2

159 158 168 175 22.0

20.2

20.6

20.0

Local Government Amount (trillion Won) 46 % of GDP 8.0

45 41 7.2

6.1

50 60 61 65 6.9

7.8

7.5

7.5

Local as % of Total 27 25 22 24 28 27 27 Not sufficient fiscal resources for local governments to support and operate the new system of local self government

Horizontal Fiscal Imbalance

Unit: Own sources revenues as % of total revenue (2005) Revenu e as % of Total Upper Level Local Governments Lower Level Local Governments (N) Metropolitan Cities and Provinces Municipal Governments County Governments Autonomous Districts 44% 38% 93% 20% (132) Under 30% 30 50% Over 50% Total 6% 50% 100% 38% 24% 100% 6% 1% 100% 64% 15% 100% (79) (39) (N) (16) (77) (88) (69) (250) Financial Self-Support - Upper level local gov’ts > Lower level local gov’ts - Urban governments > rural governments - Local gov’ts near Seoul > Other area’s local gov’ts

Intergovernmental Relations

Local governments depend heavily on the central government. “inclusive-authority model”(Wright, 1988) Roles and functions - Do not have own judicial, prosecution, police, or education systems Organizations and personnel - Vice executives dispatched by the central government - Major change in organizations or manpower structure are subjected to approval by the high level of government Budgets - Lack of balance in the distribution of revenue sources between the central and local governments - Poor tax bases in many of the local governments - Intergovernmental fiscal transfers are important revenue sources for a majority of Korean local governments

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