Local Finances Crumbling Due to 'Sesoo Punk'... Local Allocation Tax and Grants Decrease by 6.5 Trillion Won

Analysis Report from Rep. Heo Young of the Democratic Party
Greater Impact on Local Governments with Low Financial Independence
Concerns Raised Over Infringement of National Assembly's Budget Review Authority

Local finances are being strained due to consecutive 'tax revenue shortfalls' since the Yoon Suk-yeol administration took office. The central government suddenly reduced the budget it had originally planned to allocate due to reasons such as tax revenue shortages, threatening both the predictability and stability of local finances.

On the 7th, Representative Heo Young, the Democratic Party's secretary of the National Assembly's Budget and Accounts Special Committee, analyzed the scale of reductions in local allocation tax by city and province due to the re-estimation of national tax revenue last year. He projected that the local allocation tax (general allocation tax and fire safety allocation tax) distributed by the central government to local governments would be cut by 2.2 trillion won, and the local education grants distributed to local education offices would be reduced by 4.3 trillion won. As the government failed to collect the initially targeted tax revenue, it withheld 6.5 trillion won that was supposed to be distributed to local governments and education offices this year.

Originally, the government expected tax revenue from domestic taxes to be 321.6 trillion won last year, but with an anticipated shortfall of 22.1 trillion won, the local allocation tax linked to domestic taxes also decreased by 4.3 trillion won. Regarding this, the government decided to allocate 2.1 trillion won and reduce 2.2 trillion won. According to regulations, the allocation tax should first be paid to local governments and then adjusted in subsequent years based on reduced tax revenue, but the government shifted the burden of the tax revenue shortfall to localities by reducing the grants within the same fiscal year.

The situation is even more severe for local education grants. It is projected that the local education grants received by education offices from the central government will be reduced by 4.3 trillion won, with only 1.1 trillion won being paid.

Concerns have been raised that the financial difficulties of local governments with low fiscal independence are worsening due to consecutive tax revenue shortfalls. Local governments with poor financial conditions heavily rely on local allocation tax, and sudden reductions in allocation tax further damage their financial status. Lee Sang-min, senior researcher at the National Budget Research Institute, pointed out, "Among county-level local governments, some have allocation tax accounting for over 50% of their finances, and in such cases, a reduction in allocation tax would cause even greater financial damage." Representative Heo criticized, "Reducing the allocation tax immediately within the same fiscal year harms the stable financial management of local governments."

There are also criticisms that the executive branch is infringing on the National Assembly's budget review authority by managing finances at its convenience. Representative Heo stated, "The government experienced tax revenue shortfalls amounting to tens of trillions of won for two consecutive years and ultimately reduced local government budgets through tax revenue re-estimation without seeking the National Assembly's approval through supplementary budgets. It ignored the National Assembly's authority to review and finalize budgets and shifted the burden of tax revenue shortfalls to local governments. We will prepare countermeasures through the National Assembly's budget and accounts review process and legislative amendments to ensure that such incidents never happen again."