This isn't an association typically made, but it makes sense as the next step after economic reforms: China is quietly developing a system of local public finance to better organize government tax and expenditure policies -- including the initiation of a property tax.
China’s economy has developed rapidly following the 1978 implementation of economic reforms that facilitated investment, expanded trade, and introduced market mechanisms and practices. But reforms of China’s public finances have proceeded more slowly and with less publicity. The major tax reform, implemented in 1994, shifted a large share of fiscal revenues from local governments to the central government, but did not substantially reassign expenditure responsibilities back to the center. That means local governments kept nearly half of revenues -- but had responsibility for over three-quarters of public expenditures.
This is a familiar scenario for the ongoing evolution of the local, state, and federal government relationships in the U.S. According to a new study, China’s Local Public Finance in Transition, edited by Joyce Yanyun Man and Yu-Hong Hong, there are three major policy options under consideration: instituting new sources of local revenue, such as a property tax; reforming revenue transfers from the central government to local governments; and revisiting the assignment of expenditure responsibilities from local governments to the central government. A mix of all three options are most likely going forward.
Public finance is closely tied to land use and development in China. Local governments seeking revenue have been motivated to seek more revenue from the conversion of land from rural to urban use. Conversion involves compensating farmers for their land based on its agricultural use value, and then converting the land to urban use and selling it for development at a much higher value. The difference in land values accrues to local governments.
The revenue from land sales has been a major source of funding for investment in infrastructure capital, often required to provide services to the newly converted urban land. In areas where urban land is in short supply revenues have been significant, and the incentive to produce more revenue has led to excessive land conversions. This practice has created low-density development in the periphery of some metropolitan areas while leaving large areas of urbanized land undeveloped.
China’s Local Public Finance in Transition reflects the proceedings of a conference co-sponsored by the Lincoln Institute and the Peking University–Lincoln Institute Center for Urban Development and Land Policy in May 2008, and will be translated into Chinese. The book includes a foreword by Lincoln Institute president Gregory K. Ingram and a final chapter on future reform by Georgia State University economist Roy W. Bahl.