Local Government Organization and Finance: China
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Major taxes such as VAT (the subnational share), enterprise income tax and individual income tax (the subnational share), and business tax are shared by the provincial, prefecture, county, and township governments. It is still common practice that the government gets all the revenues of the enterprises it owns. In 2003, the shared taxes for provincial, prefecture, and county and lower-level governments were US$23 billion, US$27 billion, and US$25 billion, respectively, representing 76 percent, 63 percent, and 54 percent of respective total revenues. The central tax agency is responsible for collecting and administering shared taxes. Each local government has a corresponding branch of the central tax agency that is responsible for collecting central taxes and shared taxes. The local tax agency has the responsibility for collecting local taxes. This model started in 1994 with the TSS reform. It is worth mentioning that enterprise income tax and individual income tax were defined as local taxes at the beginning of the TSS reform. Consequently, responsibility for collecting these taxes was assigned to local tax agencies. This assignment has remained undisturbed, with only few exceptions, although these taxes were changed from local to shared ones in 2002. As for local government own-source taxes, the “tax revenue task” model also applies in the collection and administration of shared taxes. In summary, local governments in China have limited legislative tax autonomy, but administrative revenue autonomy is widely practiced, legally or illegally.
Intergovernmental Fiscal Transfers There are numerous intergovernmental fiscal transfer programs from the central government to provincial governments and from higher- to lowerlevel local governments. In principle, the central government determines transfers from the central government to provincial governments. Transfers to prefecture and county governments are at the discretion of the provincial government in most cases, but some prefecture governments determine the transfer to county governments. Meanwhile, the county government determines its transfer to township governments. The basic framework of subprovincial transfers is similar to that of transfers from the central government to provincial governments, although there are significant
