Hometown Tax

Gov. Issei Nishikawa of Japan’s Fukui Prefecture in October 2006 suggested a tax exemption for donations to a person’s hometown. Other politicians had proposed paying taxes to one’s hometown for regional development in the past, but Nishikawa’s appeal prompted a discussion on “hometown tax.” After a heated debate between those clamoring for a cut in the large tax gap and opponents saying the hometown tax runs counter to the user payment principle of residential tax, the Japanese government introduced the hometown tax in April 2008.

Japan’s hometown tax is a system that exempts a donation to a region selected as the donor’s hometown from the following year’s residential tax to the local government that one belongs to. The amount of hometown tax for the upper-level government (prefectures) or lower-level government (cities, counties and villages) in Japan is more than 5,000 yen (53.70 U.S. dollars) per person. The limit is about 10 percent of residential tax. While Gifu Prefecture collected 4.77 million yen (51,231 dollars) in donations in 2008, the amount of hometown taxes donated to each lower-level government was 64 times larger at 370 million yen (4 million dollars). That is like Koreans preferring to make donations to Gangneung City or Goseong County rather than Gangwon Province.

The ruling Grand National Party plans to create a hometown tax to allow people pay up to 30 percent of residential tax to cities, counties or districts in the region where they lived more than five years. If the plan is carried out, those earning an annual salary of 66 million won (59,140 dollars) can pay up to 120,000 won (107.50 dollars) from the annual residential tax of 400,000 won (358.40 dollars). Since the residential tax equal to the donation amount is exempt, the sum of taxes per person remains the same. Once the hometown tax is introduced, the residential tax revenue in the affluent capital metropolitan region such as Seoul, Incheon and Gyeonggi might decrease, but less affluent governments in the provinces of Gyeongsang, Jeolla, Gangwon and Chungcheong and Jeju will benefit.

The hometown tax, however, could bring about adverse effects such as conflict between provincial or municipal governments or heated competition to attract taxes. The financial gap between the Seoul metropolitan area and other regions is too big to overlook. The poor financial independence of provinces leads to a vicious cycle of a population decrease and shrinking provincial and municipal economies. With no increase in taxes and minimal side effects, the hometown tax can become a “good” tax. Lawmakers’ affection for their hometowns through tax payments is different from the negative feelings toward other regions.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)