4.9 Intergovernmental Transfers,2003

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diversities in the structure oftransfers across provinces because ofregional disparities in fiscal resources.Intergovernmental transfer programs can be grouped into general-purpose transfers and special-purpose transfers,as shown in table 4.9.

General-Purpose Transfers Besides tax sharing,general-purpose transfers include tax rebates and equalization transfer.Tax rebates have two parts.First,30 percent ofthe increased VAT and consumption tax over the preceding year in a province is returned to that province as a tax rebate.7 Second,the difference between the base revenue and the provincial shared part ofincome taxes is reimbursed to the provincial government by the central government.

TABLE 4.9 Intergovernmental Transfers, 2003

Provincial- Provincial/ Central-provincial prefecture prefecture-county

Amount Percentage Amount Percentage AmountPercentage (US$ oftotal (US$ oftotal (US$ oftotal Transfers billion) transfers billion) transfers billion) transfers

General-purpose grants Tax sharing 43.1 30.6 28 28.8 13.5 20.6 Tax rebate 41.5 29.5 20.2 20.8 15.3 23.3 Equalization 4.6 3.3 4.8 4.9 3.7 5.6

Subtotal 89.2 63.4 53.0 54.5 32.5 49.5

Specific-purpose grants Higher compensation for public employees 10.9 7.7 9.6 9.9 8.3 12.7 Rural tax reform 3.7 2.6 4.0 4.1 4.1 6.3 Ethnic minority regions 0.7 0.5 0.2 0.2 0.2 0.3 Prior-1994 subsidies 1.5 1.1 2.2 2.3 2.0 3.0 Ad hoc transfers 29.4 20.9 18.1 18.6 11.9 18.1 Others 5.3 3.8 10.2 10.4 6.6 10.1

Subtotal 51.5 36.6 44.3 45.5 33.1 50.5

Total 140.7 100 97.3 100 65.6 100

Percentage oflocal expenditure 67 57 66

Source: Data from Ministry ofFinance ofChina.

Local Government Organization and Finance: China 157

Income taxes,including enterprise income tax,foreign enterprise income tax,and individual income tax,were local taxes before the recent reform;they started to be shared taxes in 2002.The base revenue ofincome tax is the minimal income tax revenues that the central government set in the reform,on the basis oftotal provincial income tax revenues in 2001.The rebate rates for local governments at different levels are generally determined by the provincial governments,and they vary across provinces.Most ofthe provincial governments retain the major part oftax rebates from the central government.The purpose oftax rebates is to smooth the reform by keeping the prereform interests ofall stakeholders untouched and to encourage revenue growth.

The equalization transfer is calculated on the basis ofthe gap between standard revenue and standard expenditure,with coefficients that adjust for the size ofthe gap.Standard revenue is estimated by using the tax bases and standard tax rates,and standard expenditure is calculated by using myriad categories,including spending on administrative services,public safety, education,city maintenance,social assistance,and heating.The purpose ofgeneral-purpose grants is to equalize resources across provinces.The general-purpose transfer is the only formula-driven transfer.

The general-purpose transfer to province i is the following:

(standard expenditure ofprovince i – standard revenue ofprovince i) ,

where standard expenditure equals standard wage expenses plus standard administrative expenses plus agriculture development and administrative expenditures plus other expenditures; standard revenue equals standard local own taxes plus standard local shared taxes plus tax rebate plus revenue returned minus remittances to the central government;and is determined ex post as the ratio offunds available for transfer,divided by the size of thegap.

Standard wage expenses are derived from standard wages,the number ofcivil servants,and a regional wage level.Standard administrative expenses include personnel and operating costs for fully funded units,such as government administration,police and security,and other government agencies,and lump-sum costs for units that receive only partial funding from thebudget.Agriculture development and administrative expenditures are expenditures for agriculture and related departments.Other expenditures include only price subsidies.The tax rebate,the revenue returned,and the remittances to the central government are the actual amount determined by the central government.

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Special-Purpose Transfers There are several categories ofspecial transfers.Major ones include the following:

Prior-1994 subsidies. These were the intergovernmental transfers dealing with problems inherited from the pre-TSS system,particularly the problems ofpoor provinces.Before the TSS reform,16 provinces,mainly minority-heavy and poor,received subsidies from the central government.These transfers were designed particularly for those provinces,to ensure that every province would have a total nominal revenue no less than that of1993.Apparently,the purpose ofthese transfers was to fill the gap before and after the TSS reform to smooth the reform. Grants for minority regions. Established in 2000 with US$12 million to support the development ofminority regions,these transfers come from two sources:one is directly from the central budget,with a yearly growth rate equal to that ofcentral VAT revenue;the other is 80 percent ofthe increased central VAT revenue collected from minority regions.The transfers were designed to fill the fiscal gap for minority regions,which are less developed in general. Grants for increasing wages.The purpose ofthese transfers is to fill the fiscal gap in the middle and western provincial governments caused by the increased wage standards ofpublic sector employees. Grants for rural tax reform. China formally started a rural fee-to-tax reform in 1999 and started to abolish the agriculture tax more recently.

These reforms decreased local revenues,particularly for the county and lower-level governments,leaving a significant fiscal gap for almost all of them.The purpose ofthese transfers is to fill the fiscal gap caused by the rural fee-to-tax reform and the abolition ofthe agriculture tax.The transfers are generally provided to county governments through provincial governments. Ad hoc transfers.There are hundreds ofad hoc transfers.These transfers typically respond to high-priority emergencies,such asthe fiscal stimulus packages,bailouts for local government social protection programs, and partial payments for increases in pension benefits.

Intergovernmental transfer represents a significant part ofcentral expenditures.In 2003,total intergovernmental fiscal transfers from the central government to provincial governments were US$98 billion,accounting for more than 50 percent oftotal central expenditures.Intergovernmental