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.
