Governor Choo Calls "Bankruptcy," Requests 5% Corporate Tax Distribution

Gyeonggi Province Governor Choo Mi-ae, shortly after taking office, first raised the idea of ‘joint tax revenue sharing’ in which cities and counties share corporate local income taxes as a solution to Gyeonggi Province's fiscal difficulties. Now, she has officially proposed to the government a plan to distribute a portion of the national corporate tax to metropolitan local governments.

According to Gyeonggi Province and others on the 26th, Governor Choo attended the 10th Central-Local Cooperation Meeting held at the presidential office that day and announced a ‘local-led growth success strategy’ from the local government level, proposing an increase in the local consumption tax rate and distribution of a portion of the national corporate tax to metropolitan governments.

The meeting, presided over by President Lee Jae-myung as chair, was attended by the Prime Minister, related ministry officials, and provincial governors nationwide, where they discussed cooperation between the central and local governments during the ninth term of direct elections and tasks for promoting locally-led growth.

Among the tax reform measures Governor Choo presented that day, noteworthy is the proposal to create a new system distributing 5% of the national corporate tax to metropolitan governments.

Governor Choo assessed that while increased tax revenue resulting from the boom in advanced industries such as semiconductors accrues to the state and basic local governments, metropolitan governments shoulder the financial burden necessary for industrial complex development and infrastructure expansion. She argued that a new revenue structure is needed in which the state directly distributes a certain portion of the corporate tax it collects to metropolitan governments.

In fact, people involved in Gyeonggi Province's fiscal discussions have pointed out that “metropolitan government finances go into infrastructure construction such as roads, water resources, and electricity to support business activities, but even as industries and businesses grow through this, there is no pathway for increased tax revenue to return to metropolitan governments.”

This proposal differs in its tax sources from the ‘joint corporate local income tax’ that Governor Choo raised shortly after taking office.

After taking office in July, Governor Choo proposed as a major fiscal reform task a plan to create a portion of corporate local income tax—which is allocated to cities and counties based on corporate income—as a joint tax source to be shared between the province and cities and counties. The aim was to reduce fiscal disparities between cities and counties by redistributing corporate tax revenue concentrated in specific areas.

However, resistance has continued, particularly from cities and counties that collect substantial corporate local income taxes. They argue that while those areas take on the burden of traffic and environmental problems and infrastructure expansion from attracting large industrial complexes, sharing tax revenue with other areas could infringe on local fiscal autonomy.

The Gyeonggi Province Fiscal Innovation Task Force also failed to reach a conclusion on joint tax revenue sharing. When announcing its results mid-month, the task force diagnosed Gyeonggi Province's revenue structure and fiscal problems but did not include corporate local income tax joint revenue sharing in its final proposal. This was because opinions on joint revenue sharing did not converge.

In this situation, the card Governor Choo newly presented at the Central-Local Cooperation Meeting was not corporate local income tax collected by cities and counties, but national corporate tax collected by the central government.

While the existing joint revenue sharing was a plan to redistribution municipal tax revenue within Gyeonggi Province between the province and cities and counties, this time it is a request to transfer a portion of the central government's tax revenue to metropolitan governments. The target for securing tax sources to expand Gyeonggi Province's finances has expanded from cities and counties to the central government.

Governor Choo also proposed raising the local consumption tax rate from the current 25.3% to 40%. The aim is to realize the government policy of a 7-to-3 ratio between national and local taxes while improving the revenue structure, which is sensitive to real estate market conditions and centered on the acquisition tax, to one focused on consumption-based local consumption tax.

She also proposed converting the sunset-scheduled local education tax on tobacco to a ‘regional resource facility tax for firefighting.’ She cited the reason that although firefighters transitioned to national civil service status in 2020, national support for firefighting personnel costs amounts to only 6-9%, with most being covered by the province's general account.

Governor Choo stated, “The fiscal reality of Gyeonggi Province I faced after taking office was very grave. While the budget scale appears ample on the surface, exceeding 40 trillion won, in reality, fiscal deficits of 1-2 trillion won have accumulated over several years, and we face structural limitations that are difficult to overcome through local efforts alone.”

However, the request for national corporate tax distribution does not mean she has abandoned the existing corporate local income tax joint revenue sharing plan. According to Gyeonggi Province, joint revenue sharing continues to be reviewed as a separate matter.

A Gyeonggi Province official stated, “The (corporate local income tax joint revenue sharing) part has not been decided yet and is still under review. This time, the governor mentioned the national tax portion (corporate tax) to the central government.”