With Real Estate Tax Plummeting and K-Chips Act... Growing Concerns Over Tax Revenue Instability

Since the launch of the Yoon Suk-yeol administration, tax reduction policies aimed at easing the tax burden combined with an economic slowdown have raised concerns about a shortfall in tax revenue this year. The official prices of apartments and multi-family and row houses have fallen by more than 18% compared to the previous year, making a decrease in tax revenue from comprehensive real estate tax (종부세) and other sources inevitable. Additionally, the 'K-Chips Act (Amendment to the Restriction of Special Taxation Act)' to support national strategic industries such as semiconductors is expected to pass the National Assembly by the end of this month, which will likely result in a reduction of tax revenue by trillions of won. Furthermore, if the global economic recession causes the economic growth rate to remain in the 1% range, there is a high probability of tax revenue losses from income tax due to employment slowdown and value-added tax due to contraction in private consumption.

According to the Ministry of Economy and Finance on the 23rd, national tax revenue in January was 42.9 trillion won, down 6.8 trillion won (13.6%) from a year earlier. The national tax revenue progress rate (10.7%), which indicates the amount collected relative to this year's tax revenue target (400.5 trillion won), was the lowest in 18 years since January 2005 (10.5%). The government's decision to use the 'tax cut' card to respond to high inflation is backfiring as a decrease in tax revenue.

There is an increasing possibility that this year's comprehensive real estate tax revenue will fall short of government expectations. The government had anticipated 5.7 trillion won in comprehensive real estate tax revenue this year as of August last year, but with the official prices of multi-family housing falling to record lows this year, forecasts suggest a tax revenue decrease of up to about 2 trillion won more than expected. Choi Sang-mok, Presidential Secretary for Economic Affairs, projected that considering last year's housing-related comprehensive real estate tax revenue was about 4 trillion won, if the burden is eased to the 2020 level (1.15 trillion won) as promised by the president, a tax revenue decrease of about 2.5 trillion won could occur.

The problem is that a decrease in real estate-related tax revenue is inevitable for local governments, whose income from such taxes accounts for nearly half of their total revenue. The Korea Local Tax Research Institute expressed concerns that if the real estate transaction freeze continues this year, local governments' acquisition tax revenue will inevitably decline. The government plans to minimize the tax revenue shock by raising the fair market value ratio applied to comprehensive real estate tax from 60% last year to 80% this year, but no decision has been made yet. The fair market value ratio is the rate multiplied by the official price to determine the tax base for comprehensive real estate tax or property tax; even if official prices fall, increasing this ratio can compensate for the shortfall in tax revenue.

The 'K-Chips Act (Amendment to the Restriction of Special Taxation Act)' to support national strategic industries such as semiconductors is also increasing concerns about tax revenue shortages. The K-Chips Act, which passed the National Assembly's Planning and Finance Committee the day before, is awaiting final approval at the plenary session on the 30th. The core of the K-Chips Act is to raise the tax credit rate for facility investments in national strategic technology industries such as semiconductors and secondary batteries from the current 8% to 15% for large and medium-sized enterprises, and from 16% to 25% for small and medium-sized enterprises. This is expected to reduce tax revenue by 3.65 trillion won starting next year and by about 6 trillion won by 2026. This is why some in the political sphere criticize the tax credit as excessive.

The extension of the fuel tax reduction measure, which ends next month, is also an issue. The government began reducing fuel tax by 20% in 2021 in response to international oil prices, and this year applies a 25% reduction on gasoline fuel tax and a 37% reduction on diesel and liquefied petroleum gas (LPG) butane. As the fuel tax reduction has continued for a year, tax revenue decreased by 5.482 trillion won (-33.0%) compared to the previous year. From a tax revenue perspective, abolishing the fuel tax reduction to cover the shortfall is necessary, but there are concerns that a sudden surge in gasoline and diesel prices could fuel inflation. The government is likely to gradually adjust the extent of the fuel tax reduction, so the financial authorities' burden is expected to continue. The private budget analysis institute, Nara Salrim Research Institute, estimated that the tax revenue shortfall over the next five years will be about 60.2 trillion won, with decreases of 15.7 trillion won in income tax, 27.9 trillion won in corporate tax, 7.4 trillion won in securities transaction tax, and 8.1 trillion won in comprehensive real estate tax.