[Tax Story] Post-Corona Era and Green Automobile Tax

Baek Jeheum, Lawyer at Kim & Chang

The Chuseok holiday, marking the great migration of 50 million people, is just around the corner. According to the 'Chuseok Holiday Traffic Survey' conducted by the Korea Transport Institute on the 20th, due to the government's recommendation to refrain from travel to prevent the spread of COVID-19, the number of travelers during this year's holiday period is expected to decrease by 28.5% compared to last year, totaling approximately 27.59 million people. Even among those who must travel, responses indicated a higher preference than usual for using private cars, which minimize multiple contacts, rather than public transportation. Correspondingly, new domestic car registrations in the first half of this year reached about 950,000 units, a 6.6% increase compared to the same period last year. Compared to a 36% decrease in public transportation use in the metropolitan area from last year, it is no exaggeration to say that the untact (contactless) sentiment caused by COVID-19 has been directly reflected in private car purchases.

The number of registered cars was 3.39 million in 1990, but by 2019 it had reached approximately 23.68 million, making cars an essential item owned by about one in every two people. Nevertheless, it is unfamiliar that a total of 11 taxes, including national and local taxes, are imposed on automobiles. Taxes related to automobiles include: ① at the acquisition stage, individual consumption tax, education tax, value-added tax, acquisition tax; ② at the ownership stage, ownership automobile tax, local education tax; and ③ at the operation stage, individual consumption tax on fuel, education tax, value-added tax, transportation·energy·environment tax, and driving automobile tax. As of 2018, out of 84.3183 trillion KRW in local tax revenue, automobile taxes accounted for 14.0476 trillion KRW, playing a significant role as a financial pillar for local governments.

The ownership automobile tax, paid semi-annually in June and December, is levied on the owner registered in the local government's automobile registry as of the tax base date, and it has characteristics of both property tax and burden charges. Since ownership of the automobile is a tax requirement, it has the nature of a property tax, but it also carries the characteristics of a road damage charge for road use and an environmental pollution charge for external diseconomies such as air pollution. The automobile tax rate structure varies according to vehicle type (passenger, van, cargo, etc.) and use (commercial, non-commercial). For passenger cars, a progressive tax rate based on engine displacement is applied regardless of use. Electric vehicles are taxed differently depending on use, and vans, cargo vehicles, and special vehicles are taxed with fixed amounts based on type and weight. The driving automobile tax is characterized by the fact that 36% of the transportation·energy·environment tax levied per liter of fuel purchased is imposed as a value-added tax.

The origin of automobile tax is generally considered to be the 'vehicle tax' newly established as a provincial tax in 1921. The vehicle tax revised in 1949 was levied based on the seating capacity for private passenger cars, and in 1958, it was renamed 'automobile tax' and levied based on vehicle type and axle distance. The 1991 revision introduced a seven-tier tax system based on engine displacement for non-commercial passenger cars, and the 1999 revision simplified this to five tiers reflecting the results of the Korea-US trade negotiations. From the 2001 revision, to promote tax burden equity between new and used cars, a system was introduced to reduce the tax amount by 5% per year starting from the third year after registration, based on both engine displacement and vehicle age. In 2012, under the Korea-US Free Trade Agreement, the automobile tax rate brackets for passenger cars were reduced to three tiers based on engine displacements around 1000cc and 1600cc, which remains the current system. The engine displacement standard introduced in 1991 has continued for 30 years, and there is criticism that it insufficiently reflects the property, usage, and environmental aspects of automobiles. Although bills proposing to change the taxation method to be based on car price were introduced in the 19th and 20th National Assemblies, all were discarded due to the expiration of the legislative session.

In the United States, although it varies by state, automobile ownership is subject to both a road use tax (federal tax) based on vehicle weight and a property tax (state tax) based on vehicle value. Japan imposes an automobile weight tax (national tax) and an automobile tax (local tax), with the former based on vehicle weight and the latter based on engine displacement. The United Kingdom's automobile tax features a dual system: after one year of acquisition, it is levied based on carbon dioxide emissions, and from the second year onward, it is based on vehicle price and fuel type. Notably, most European Union (EU) countries, including Germany and France, consider carbon dioxide emissions as one of the criteria for ownership-stage automobile tax. The European Automobile Manufacturers Association has continuously urged EU member states to introduce tax criteria based on greenhouse gas emissions, and in response, as of 2020, about 19 EU member countries use eco-friendly criteria such as carbon dioxide emissions, exhaust gases, and fuel efficiency as standards for automobile acquisition or ownership tax.

Korea's automobile tax, which is based on engine displacement, is criticized for insufficiently reflecting the property tax nature of automobiles and thus violating the principle of ability-to-pay taxation. Similarly, it is viewed as inadequate in ensuring equity for new types of vehicles such as electric cars. Considering the environmental burden and essential nature of automobiles, there are proposals to exempt ownership automobile tax while increasing the driving automobile tax levied on automobile fuel. As seen in the cases of EU countries, the global standard for automobile tax is proportional to the degree of environmental pollution caused, such as carbon dioxide emissions. The Ministry of Environment's budget for 2020 increased by about 20% from the previous year to 8.4 trillion KRW, of which approximately 30%, or 2.3 trillion KRW, is allocated to fine dust reduction measures.

As fiscal spending on social costs caused by automobiles continues to rise, it is worthwhile to consider mid- to long-term tasks to reduce these externalities by adopting carbon dioxide emissions or fuel efficiency as tax criteria. For smooth institutional transition, a compromise plan could be considered to gradually reduce the current engine displacement-based automobile tax over several years while progressively increasing taxation based on carbon dioxide emissions or fuel efficiency. It is time to contemplate future-oriented automobile tax systems in preparation for the post-COVID-19 era.