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Bigger share of taxes proposed for local govts

By Zhao Yinan  (China Daily)

08:27, June 28, 2012

Lawmakers have suggested distributing more tax revenues to local governments to meet increasing city construction and public welfare, a move that would reduce their heavy reliance on land sales for revenue.

Shi Xiushi, head of the National People's Congress Financial and Economic Affairs Committee, made the suggestion on behalf of the committee at the ongoing session of lawmakers.

Shi also suggested increasing transfer payments among different levels of government to promote fiscal capabilities in underdeveloped areas and improve public service.

The suggestion was made in the wake of an audit report that said the fiscal power of local governments is "stressful" and their fiscal management "substandard".

Despite a continuous increase of revenues for local governments, Liu Jiayi, China's top auditor, said on Wednesday that the revenues of county and city governments are unsustainable, that these governments tend to overspend and their management of revenue is substandard.

The report, looking into the financial situations of county and city level governments across 18 provinces, autonomous regions and municipalities, has shown a continued increase in government revenues, as well as a lack of stable tax funds for local governments.

It said the subsidies received by county and township governments from the central government in 2011 had tripled since 2005.

However, Liu noted county governments have been relying heavily on non-tax income - about 60 percent of their total annual revenues - since they have limited access to tax revenue.

Liu said the high ratio of non-tax income in total revenues implies a lack of sustainability and stability in the financial capability of the county governments.

Shen Xiangchen, director of the finance bureau in Jiaozuo, Henan province, said nearly 80 percent of city government revenues have to be used for administrative costs and legally mandated expenditures.

For instance, China's law requires the growth rate of education expenditure be kept at a certain speed. Similar requirements are also imposed on investment into scientific and technological research and agriculture.

Shen said after allocating money for these mandatory sectors, there is little money left for improving public service and investment.

Hao Ruyu, an expert on taxation at the Central University of Finance and Economics, said rising expenses have been challenging local governments, while their revenue failed to keep pace.

He said local government's responsibilities for city construction and public welfare, such as construction of government-subsidized houses, have increased each year, but the amount of tax revenues available to local governments remains the same.

The current taxation system, based on a fundamental financial reform in 1994, has reversed the fiscal power of the central and local governments.

Research by the Institute of Fiscal Science, a think tank affiliated to the Ministry of Finance, has shown that the current fiscal system allows the central government to take more than half of tax revenues, leaving a smaller proportion for local governments.

It is in stark contrast to the ratio before the reform, when local governments could use up to 65 percent of the revenues, the research found.

However, the reduction in income is accompanied by increasing responsibilities of local governments to finance education, agriculture and other public utilities.

It also found local governments have to cover more than 75 percent of public expenses, while the central government makes up the remaining 25 percent.

Jia Kang, director of the institute, said the unbalanced tax division has, to some extent, made local governments turn to non-tax income, such as land sales, as well as issuing government debts, to increase income.

"A redistribution of tax revenue is one of the ways to deal with the issue, since the responsibility of governments should be fairly matched with its fiscal power," he said.


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