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Governance

Local finance 3

Local Finance under the Constitution of the Fifth Republic (1980 to 1990)
 
1. Overview
 
(1) Supervision over Local Finance
The Constitution of the Fifth Republic did not differ much from the Yushin Constitution in terms of its provisions for overseeing local finance and fiscal policies. The Local Finance Act (LFA), however, underwent a major overhaul in 1988 upon the rise of the Sixth Republic. The amended LFA mitigated the central government’s grip on local governments and finance. Under Article 64, for instance, local governments that had been formerly required to seek pre-approval from the Ministry of Home Affairs, mayors, or governors before creating new public safes were now able to create such safes on the condition of reporting them afterward.

In addition, the relationship between national policy and local finance grew stronger. The rates of central government subsidies were defined in separate statutes, and local match-ups for government subsidies were made mandatory (Article 19, LFA of 1986). On December 31, 1986, a new law on the budgeting and management of subsidies was enacted, thus repealing the Grant Management Act (GMA).
 
(2) Revenue Structure
Major changes in the local fiscal structure included, among other things, the introduction of the tobacco sales tax in the Local Tax Act (LTA) (December 24, 1984) to compensate for the significantly reduced rate of farmland tax. As a result, the tobacco sales tax came to occupy 22 percent of the standard tax assessment in cities, and 55 percent in rural areas, thereby lowering the amount of local taxes in rural areas and raising the revenue of urban and tourist-oriented areas by comparison. The amendment of the Local Subsidy Act (LSA) on April 3, 1982, also revived the legal grant rate system that had been abolished by the August 3 Measures. The amended LSA required that 13.27 percent of the total amount of domestic taxes be spent on local subsidies, thus ensuring greater stability in local finance (KRILA, 1998, 409). As a result of these and other measures, the proportion of local finance in national finance began to rise above 30 percent in the 1980s.
 
[Table 4-14] Changes in Local Revenue Structure: 1981 to 1990
(Units: KRW 100 million, percentage)
 
Year Total Local taxes Percentage (%) Non-tax revenue Percentage (%) Local subsidies Percentage (%) Subsidies Percentage (%)
1981 29,640 9,144 30.9 7,308 24.7 7,988 27.0 6,274 21.2
1982 33,767 11,192 33.1 8,319 24.6 7,009 20.8 5,491 16.3
1983 40,148 13,972 34.8 9,961 24.8 8,588 21.4 5,708 14.2
1984 47,595 15,084 31.7 12,591 26.5 10,200 21.4 6,971 14.6
1985 49,531 16,546 33.4 12,297 24.8 10,061 20.3 7,988 16.1
1986 55,548 18,098 32.6 13,030 23.5 12,959 23.3 8,907 16.0
1987 75,717 21,923 29.0 14,501 19.2 16,097 21.3 17,619 23.3
1988 99,331 30,989 31.2 23,000 23.2 17,208 17.3 18,071 18.2
1989 144,946 49,608 34.2 31,362 21.6 21,869 15.1 27,893 19.2
1990 193,850 63,786 32.9 46,250 23.9 27,647 14.3 34,192 17.6
 
Source: National Statistics Office, KOSIS Fiscal Statistics, each year
 
[Table 4-15] Comparison of National and Local Finances: 1981 to 1990
(Unit: KRW 100 million)
 
Year National finance (A) Local finance (B) B/A (%)
Amount Index Amount Index
1981 81,744 100 29,640 100 36.3
1982 95,259 117 33,767 114 35.4
1983 107,533 132 40,148 135 37.3
1984 118,289 145 47,595 161 40.2
1985 130,089 159 49,531 167 38.1
1986 146,993 180 55,548 187 37.8
1987 178,839 219 75,717 255 42.3
1988 220,408 270 99,331 335 45.1
1989 255,909 313 144,946 489 56.6
1990 313,046 383 193,850 654 61.9
Source: National Statistics Office, KOSIS Fiscal Statistics, each year
 
 
2. Local Tax System
 
The local tax system in the Fifth Republic remained more or less the same as the one in the preceding Republic, with the exception of the introduction of the tobacco sales tax at the level of cities and counties in 1984 and the excessive landholding tax in 1986. In anticipation of the dawn of the age of local government in 1986, the number of tax-exempt items were reviewed and reduced, and the tobacco sales tax rate was increased in an effort to raise the additional revenue needed for expanding local governments.

The Sixth Republic came into being in 1988 and accompanied a number of important changes in the local tax system including the introduction of license, property, and excessive landholding taxes (the last of which was later renamed the composite land tax) in Seoul and directly governed cities; and the introduction of the local business tax at the district (gu) level.
 
 
3. Local Finance Adjustment System
 
(1) Local Subsidies
A National Assembly session in 1981 saw its members debating whether the August 3 Measures should be maintained intact. The session ended with the submission of a bill for the Abolition of the Emergency Measures Regarding the Stability and Growth of the Economy. The bill subsequently led to the amendment of the LSA in 1982; it also fixed the local subsidy rate at 13.27 percent of the total amount of domestic taxes collected. Although the new rate fell far behind the 17.6 percent of domestic taxes that had been proposed for local subsidies in 1968, it nonetheless helped to secure a stable source of revenue for local governments. The amendment of the LSA in 1988 exempted self-governed districts (gu) from their obligation to pay local subsidy taxes.
 
[Table 4-16] Changes in Local Tax Items: 1983~89
 
Year Taxes in the provinces, Seoul, and metropolitan cities Taxes in cities, counties, and districts (gu)
General Earmarked General Earmarked
1983 Taxes on property acquisition, registration, and licenses
* Additional tax items for Seoul and metropolitan cities: taxes on resident, property, automobile, farmland, cattle slaughter, and horseraces
Taxes on urban planning, public facility, and business location (except for provinces) Taxes on residents, properties, automobiles, farmland, cattle slaughter, and horseraces Taxes on urban planning, public facility, and business location (except for provinces)
1984 Same as above Same as above Taxes on residents, properties, automobiles, farmland, cattle slaughter, horseraces, and tobacco sales Same as above
1986 Taxes on property acquisition, registration, and licenses
* Additional tax items for Seoul and metropolitan cities: taxes on resident, property, automobile, farmland, cattle slaughter, horseraces, and excessive landholding
Same as above Taxes on residents, properties, automobiles, farmland, cattle slaughter, horseraces, tobacco sales, and excessive landholding Same as above
1988 -Provincial taxes on property acquisition, registration, licenses, and horseraces
-Additional tax items for Seoul and metropolitan cities:  taxes on property acquisition, registration, residents, automobiles, farmland, cattle slaughter, horseraces, and tobacco sales
-Seoul and metropolitan city taxes on urban planning and public facilities -City and county taxes on residents, property, excessive landholding, automobiles, farmland, cattle slaughter, and tobacco sales
-District (gu) taxes on licenses, properties, and excessive landholding
-City and county taxes on urban planning, public facilities, and business locations
-District (gu) tax on business locations
1989 Same as above Same as above -City and county taxes on residents, property, excessive landholding, automobiles, farmland, cattle slaughter, and tobacco sales
-District (gu) taxes on licenses, properties, and composite land
Same as above
Source: LTA, amended each year
 
(2) Government Subsidies
The proportion of government subsidies in local revenue continued to dwindle in the 1980s, especially in comparison to the 1970s. Furthermore, government subsidies claimed 51 percent of local spending, which in effect imposed a heavy financial burden on local governments.
 
[Table 4-17] Local Subsidies in the 1980s
 
  1982 1988 1989 1990
Sources of revenue 13.27% of domestic taxes combined (except defense and education taxes). Increases allowed to account for unforeseen increases in demand and subject to central government approval Same as 1982 Same as 1988, except for the exclusion of excessive landholding tax from domestic taxes Same as 1989, except for the exclusion of local grants from domestic taxes
General taxes 10/11 of general taxes Same as 1982 Same as 1982 Same as 1982
Earmarked taxes 1/11 of earmarked taxes Same as 1982 Same as 1982 Same as 1982
Mode of distributing general taxes When reference financial revenue falls short of reference financial demand Same as 1982, but self-governed districts now exempt Same as 1988 Same as 1988
Mode of distributing earmarked taxes Special financial demand: emergency situations or sudden drops in local revenue; creation, restoration, expansion, or renovation of local government buildings or public facilities
-To be distributed either upon request or by the directive of the Ministry of Home Affairs
Same as 1982 Same as 1982 Same as 1982
Sources: LSA, amended each year; Enforcement Ordinance for the LSA, amended each year

Source: Korea Institute of Public Administration. 2008. Korean Public Administration, 1948-2008, Edited by Korea Institute of Public Administration. Pajubookcity: Bobmunsa.