Conflict is brewing between the central and regional governments over tax cuts on real estate transactions being pushed by President Park Geun-hye to revive the housing market.

The central government announced that it would indefinitely cut the property acquisition tax rate in accordance with apartment prices, despite growing opposition by regional offices amid increasing welfare costs and revenue shortfalls.

Given that the purchase tax accounts for a significant share of regional income at over 30 percent, a drop in such a tax would likely deal a further blow to regional finances already hit by cuts in infrastructure spending and state subsidies.

The central government, nevertheless, has opted to boost the ailing apartment market over making up the tax shortfall by lowering the purchase tax rate and the supply of housing as lackluster property transactions could make it more difficult for households to deleverage their debt.

“The government will discuss the (tax) matter with related agencies and regional offices to draw up detailed measures for National Assembly approval by August,” said the Ministry of Strategy and Finance, the Ministry of Security and Public Administration and the Ministry of Land, Infrastructure and Transport in a joint statement.

“The government will exert efforts to speed up the implementation of its property stimulus designed last April,” they added.

Korea’s comprehensive real estate measures unveiled in April included easing the capital gains tax and loan qualification requirements for borrowers.

The Finance Ministry noted that the central government would help regional offices to “preserve” their tax revenue through other means of taxation and coordination between the central and regional governments.

Its move is based on the premise that lower taxes would increase transactions and thus income for the governments during the economic slowdown.

But a group of governors and metropolis mayors issued a joint statement opposing the proposed tax reduction.

“The financial condition of local governments will be further aggravated by the expected revenue reduction. We will mobilize all possible means to thwart the move to legislate the tax cuts,” they said in a joint news conference in Seoul.

Mayors of Seoul, Busan, Daegu, Incheon, Ulsan and Sejong, and governors of South and North Chungcheong, North Jeolla and North Gyeongsang provinces attended the conference.

Regional offices and special interest groups have called for increased central government subsidies to fund local welfare spending and increased social returns in provincial areas such as through the planned sale of Kyongnam Bank, an arm of Woori Financial that is up for privatization.

However, the government had previously indicated that regional offices must bear the financial burden of welfare financing, which triggered a series of debates over the matter between the governments.

The central government does not want to further increase national debt that has ballooned over the past five years due largely to the costs of the four-river restoration project.

It will not introduce or raise taxes but instead decrease the number of exemptions and benefits that had been previously enjoyed to stave off the global financial crisis, as pledged by President Park during her election campaign. A tax increase, especially for the top income bracket, could also lead to political strife, even though it is one way to increase public spending on welfare and infrastructure.

However, market analysts are skeptical of whether such a move on the real estate purchasing tax would rejuvenate the housing market in the mid- to long term. A growing number of people seem to opt for jeonse, a deposit receivable upon the end of the lease contract, rather than purchasing homes.

Lowering taxes may increase short-term transactions and boost the construction industry, but Korea’s still-high housing prices continue to pose a heavy burden on apartment seekers, analysts say.

“Structural challenges (persist) that continue to plague Korea’s housing market, including high levels of household debt and low affordability arising from house prices that remain elevated, despite moderating somewhat since 2011,” said Moody’s Investors Service in a report.

By Park Hyong-ki (hkp@heraldcorp.com)