3. Finance of Local Government 3. Finance of Local Government 3-1. Revenue Structure 3-2. Revenues from Own Sources 3-3. Transfers from Central Government 3-1. Revenue Structure 3-2. Revenues from Own Sources 3-3. Transfers from Central Government

Revenue Structure From Own Sources - Local Taxes - Non-Tax Revenues Transfers from Central Government - Local Shared Taxes (except for autonomous districts) - National Subsidies - Local Transfer Funds (up to 2004) - National Balanced Development Special Account (since 2005) Local Borrowing Transfers from Upper-level to Lower-level Local Governments - Metropolitan Subsidies and Provincial Subsidies - Adjustment Grants (only for autonomous districts)

Revenue Structure From Own Sources61%60%59%62%65%63% Local taxes31%32%31% 34%33% Nontax revenues30%28% 31% 30% Fiscal Transfers34%36%37%35%33%34% Local shared taxes13%16%14%15% 18% National subsidies15%14%18%15%14%16% Local transfer funds6% 5% 4%NA Local Borrowing5% 4%3% TOTAL (trillion won)

Revenues from Own Sources Income Tax - Resident Tax (income part), Farmland Income Tax Consumption Tax - Tobacco Consumption Tax, Butchery Tax, Leisure Tax, Local Driving Tax Property Tax - Acquisition Tax, Registration Tax, License Tax, Property Tax, Automobile Tax, Urban Planning Tax, Common Facilities Tax, Business Office Tax Other Tax - Resident Tax (household part), Regional Development Tax, Local Education Tax Local Taxes (until 2010) Local Taxes (until 2010)

Revenues from Own Sources Income Tax - Local Income Tax Consumption Tax - Local Consumption Tax, Tobacco Consumption Tax, Leisure Tax Property Tax - Acquisition Tax, Registration & License Tax, Property Tax, Automobile Tax, Resident Tax(business office part), Other Tax - Resident Tax(household part), Regional Resource & Facility Tax, Local Education Tax Local Taxes (Since 2011) Local Taxes (Since 2011)

Revenues from Own Sources Local Taxes (until 2010) Local Taxes (until 2010) Resident Tax Farmland Income Tax Tobacco Consumption Tax Butchery Tax Leisure Tax Local Driving Tax Acquisition Tax Registration Tax License Tax Property Tax Automobile Tax Urban Planning Tax Common Facilities Tax Business Office Tax Regional Development Tax Local Education Tax Province Tax Metro city Tax City/County Tax Autonomous District Tax

Revenues from Own Sources Local Taxes (Since 2011) Local Taxes (Since 2011) Resident Tax Tobacco Consumption Tax Leisure Tax Acquisition Tax Registration & License Tax Property Tax* Automobile Tax Regional Resource & Facility Tax Local Education Tax Province Tax Metro city Tax City/County Tax Autonomous District Tax Local Consumption Tax Local Income Tax

Revenues from Own Sources Non-Tax Revenues Current non-tax revenues Temporary non-tax revenues Methods used for raising non-tax revenues - utilization of profit-creating businesses - local public enterprises (corporations) - public land development - price rationalization of fees and charges Local Borrowing Local Bonds/ Borrowing both domestically and abroad Must obtain consent from the Ministry of Public Administration and Security if exceeding limits

Transfers from Central Governments Local Shared Taxes - Supplementing local fiscal resources and equalizing local fiscal capabilities - general grant: general discretionary purpose “money without string” % of domestic tax revenues General Shared Tax: 96% - Allocated by Formula, Standard Financial Demand – Standard Tax Revenue Special Shared Tax: 4% - Allocated on the basis of special local needs, i.e., Natural disaster Since %15%18.3%19.13%19.24%

National Subsidies - specific grant, “money with strings” - Encourage local governments to undertake certain projects favored by the central government - provide financial assistance for special or unusual occasions (trillion won) National subsidy (A) Total transfers (B) A/B15.3%17.4%19.3%27.2%23.0%22.7% Transfers from Central Governments

Regional Development Special Account Since 2005 Regional Development Special Account - Block Grant - Promoting the revitalization of depressed areas - Developing local culture, art, and tourism - Strategic development of regional industry clusters Revenue Sources - Proceeds from liquor tax revenues - Transfers from several special accounts such as rural restructuring, environmental improvement, and land management (originally national subsidies) Transfers from Central Governments

Local Transfer Funds - To secure more balanced regional development - To serve as a supplement to local fiscal resources Revenue Sources - liquor tax, transportation tax, rural development tax Transfers from Central Governments Road maintenance48% 39%40%44% Agricultural & fishery area development 8% 9% 8% Water pollution prevention25%26%33%32%31% Youth support1% Local development17%18% 19%17% TOTAL (trillion won)

Transfers from Upper-Level to Lower-Level Gov’t Metropolitan and Provincial Subsidies - To strengthen the connection between upper-level local governments and specific projects at the lower-level local governments - Similar to National Subsidies Adjustment Grant - Revenue sharing program between metropolitan cities and their own autonomous districts - Similar to Local Shared Taxes - Revenue sources: Acquisition Tax and Registration Tax Contribution rates vary depending on each metropolitan city’s ordinances. Transfers from Central Governments

4. Intergovernmental Relations 4. Intergovernmental Relations 4-1. Vertical Fiscal Imbalance 4-2. Horizontal Fiscal Imbalance 4-3. Intergovernmental Relations 4-1. Vertical Fiscal Imbalance 4-2. Horizontal Fiscal Imbalance 4-3. Intergovernmental Relations

Vertical Fiscal Imbalance YearCentral GovernmentLocal GovernmentLocal as % of Total Amount (trillion Won) % of GDPAmount (trillion Won) % of GDP Not sufficient fiscal resources for local governments to support and operate the new system of local self government

Horizontal Fiscal Imbalance Revenu e as % of Total Upper Level Local Governments Lower Level Local Governments (N) Metropolitan Cities and Provinces Municipal Governments County Governments Autonomous Districts Under 30% 44%38%93%20%(132) 30-50%6%38%6%64%(79) Over 50% 50%24%1%15%(39) Total100% (N)(16)(77)(88)(69)(250) Financial Self-Support - Upper level local gov’ts > Lower level local gov’ts - Urban governments > rural governments - Local gov’ts near Seoul > Other area’s local gov’ts Unit: Own sources revenues as % of total revenue (2005)

Intergovernmental Relations Local governments depend heavily on the central government. “inclusive-authority model”(Wright, 1988) Roles and functions - Do not have own judicial, prosecution, police, or education systems Organizations and personnel - Vice executives dispatched by the central government - Major change in organizations or manpower structure are subjected to approval by the high level of government Budgets - Lack of balance in the distribution of revenue sources between the central and local governments - Poor tax bases in many of the local governments - Intergovernmental fiscal transfers are important revenue sources for a majority of Korean local governments

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