Basic Report

The study aims to analyze the effects of various environmental changes surrounding local governments on local finances, especially local allocation tax, and to suggest a restructuring plan for the local allocation tax based on this analysis. In order to achieve this study purpose, environmental changes that affect local finances were examined from the aspects of socioeconomic and political and administrative aspects. In socio-economic aspects, the effects of the demographic structure changes(low fertility, aging population, and decrease in the working-age population) and changes in economic conditions on the local allocation tax were analyzed. In political and administrative aspect, the effect of the second-stage fiscal decentralization of the Moon Jae-in administration on the local allocation tax was analyzed. This study reviews the appropriateness of the financial guarantee function and fiscal adjustment function of the current local allocation tax in Korea, and identifies the impact of three above mentioned environmental changes on local allocation tax, focusing on the financial guarantee function and the fiscal adjustment function. The main research results are as follows.
  
   First, in order to understand the impact of demographic structure changes on the local allocation tax, the changes in the standard financial demand and the standard financial income are estimated by applying the per unit changes of the number of population (in thousands), the square of the population, the proportion of the population aged 65 and over (%), and the area based on the esimated population by cities according to Statistics Korea’s future population estimation. Based on these estimates and the mid to long-term fiscal forecast of the National Assembly Budget Office, the amount of local allocation tax by the domestic tax revenue growth scenario is estimated. Looking at the changes in the standard fiscal demand and standard fiscal income according to the demographic change, it was found that the standard fiscal demand and the standard fiscal income increased in both metropolitan areas and local governments. However, it was found that the increase in the standard financial income was larger in the metropolitan governments, while the increase in the standard financial demand was larger in the local governments. Looking at the change in the calculation of local allocation tax due to demographic change, in the case of Busan, where the population decline is severe, the local allocation tax decreases as of 2026 under Scenario 1. In the case of other local governments, it is also found that the local allocation tax do not increase much over the next five years as the population decreased.
  
   Second, a scenario analysis was conducted on the impact of changes in economic conditions on local allocation tax by using the 2019-2028 mid-term fiscal forecast of the National Assembly Budget Office and the national tax revenue forecast of the 2020 NABO long-term fiscal forecast. In addition, the standard financial demand and standard financial income of local governments were estimated by applying the average annual growth rate of individual local governments for the last 5 years (2017-2021). As a result of the analysis, given that the rate of increase in the current standard fiscal demand and standard fiscal revenue is maintained, there will be regions distributed less amount of local allocation tax even if the national tax revenue increases by 3.5%. In particular such cases are more found among basic local government level.
  
   Third, the effect of second stage of fiscal decentralization on local allocation tax was analyzed based on the provision of 「Partial Amendment to the Local Tax Act」 proposed on August 25, 2021. Calculating new distribution of local consumption tax due to the increase in the local consumption tax rate, a total of KRW 16,863 Billion of the new local consumption tax are estimated, among KRW 13,315 billion distributed to regional local governments, KRW 2,555 billion to basic local governments and KRW 9,931 billion to local office of Education. Second fiscal decentralization is analyzed to decrease the distribution of local allocation tax, general revenue 1(ordinary tax + local allocation tax) and general revenue 2 (ordinary tax + local allocation tax + adjustment grant) for both regional and basic local governments. In particular, Gyeongsangbuk-do was analyzed to face the largest decline. The increase in local consumption tax rate results the increase in fiscal equality index than the current level, indicating that the fiscal gap between local governments has slightly widened,
  
   In conclusion, based on the analysis result, the restructuring plan of local allocation tax in order to respond to the environmental changes can be suggested as follows. First of all, it is necessary to raise the legal rate, which is currently set at 19.24% of domestic tax. Secondly, a separate system is necessary to be in charge of the fiscal adjustment function, coordinating local allocation tax to be in charge of the fiscal guarantee function only. Lastly, as the most realistic aspect, it is necessary to improve the calculation method for the standard fiscal demand and the standard fiscal income, and to improve the standard fiscal income aspect of system, which has not been well dealt like the differential rate system.