Gyeonggi Governor Proposes Tax Reforms to Bolster Local Finances

Gyeonggi Province Governor Kim Dong-yeon has formally requested an increase in the local consumption tax rate and the establishment of a system to allocate a portion of corporate tax to metropolitan local governments. The proposals were presented at the 10th Central-Local Cooperation Meeting, chaired by President Lee Jae-myung.

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Please increase the local consumption tax rate from 25.3% to 40%, and establish a system to distribute a portion (5%) of the national corporate tax to metropolitan local governments.

Governor Kim highlighted the dire financial situation in Gyeonggi Province, noting a cumulative deficit of 1 to 2 trillion won annually. He explained that despite a budget exceeding 40 trillion won, the province faces structural limitations that self-help measures cannot overcome. The increasing demand for welfare services due to population growth and rapid aging, coupled with a heavy reliance on the volatile acquisition tax tied to the real estate market, exacerbates the financial pressure.

To address these fiscal challenges, which Kim stressed are critical for the sustainability of local autonomy nationwide, he proposed three key tax reforms. First, he advocated for raising the local consumption tax rate from the current 25.3% to 40%. This move aims to align with the national goal of a 7:3 ratio between national and local taxes and shift the revenue structure from acquisition tax to a more stable consumption-based local consumption tax.

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The financial reality of Gyeonggi Province that I have faced since taking office has been very severe.

Second, Kim proposed creating a system to allocate 5% of the national corporate tax to metropolitan local governments. He argued that while increased tax revenue from booming high-tech industries like semiconductors benefits national and local governments, metropolitan areas bear the primary burden of supporting industrial complexes and infrastructure. Therefore, a more equitable distribution of tax revenue is necessary.

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Although the budget scale appears generous, exceeding 40 trillion won, there is actually a cumulative financial deficit of 1 to 2 trillion won for several years, facing structural limitations that are difficult to overcome through self-help efforts alone.

Third, the governor requested the conversion of the expiring local education tax on tobacco into a local resource facility tax for firefighting. He pointed out that despite firefighters becoming national employees in 2020, national support for their salaries remains low, forcing provinces to cover most of the costs through their general accounts. This conversion would secure stable funding for firefighting services and ensure equitable service provision across regions.

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The unstable revenue structure, with its excessive dependence on the acquisition tax, which is influenced by the real estate market, is exacerbating financial pressure.