Tax distribution formula reworked for fiscal parity

Tax income distribution between the central and local governments has been rebalanced to ensure that the slew of planned tax and fee cuts will not drag some regions into financial problems, according to a statement from the State Council, the country's cabinet.

Under the new plan, value-added tax income for the central and local governments has been fixed at 50 percent each, compared with 75 percent for the central government before VAT reforms in 2016.

The equitable sharing system will ensure that the local governments get a stable tax income, said a government statement released on Wednesday.

In order to increase tax sources for local governments, some consumption taxes on goods will be transferred to local governments, it said. Before the reform, the consumption tax was collected by the central government.

Consumption tax on some items, such as luxury watches, jewelry and jade, will be transferred to local governments, while other qualified items will be considered later, the statement said.

The Ministry of Finance said that during the first eight months of this year, total tax income was 11.71 trillion yuan ($1.64 trillion), and nearly 40 percent of it came from VAT. The consumption tax stood at 1.04 trillion yuan in the same period.

Li Chao, the chief macroeconomy analyst of Huatai Securities, said the reform will help ease the fiscal deficit pressures of local governments, amid tax and fee reductions and increasing economic downward risks.

The reform, which boosted the local government share of VAT income to 50 percent, compared with 25 percent before 2016, will increase local governments' income and encourage them to spend more to support economic growth, he said.

Finance Minister Liu Kun said in a recent news conference that the total tax and fee reductions may exceed 2 trillion yuan this year. It was the strongest cut in history. In the first half, about 1.17 trillion yuan of taxes and fees have been reduced, according to the ministry.

Lin Jiang, a professor of economics at the Sun Yat-sen University, said local governments are lacking in tax resources and highly dependent on VAT income. If the tax and fee cut plan continues, the local governments will face some difficulties in stemming income declines and would need to find more tax income resources in the future.

The government's general budgetary revenue rose by 3.2 percent in the first eight months, well below the 9.4 percent growth in the same period last year, and lower than the full-year target of 4.9 percent, the Ministry of Finance said.

Some of the local governments have already adjusted their budgets after the first six months of this year, and the annual fiscal targets can be achieved, according to the finance minister.

The State Council had earlier urged local governments to use a part of the next year's special bond quota in advance, and the maximum value could be 1.29 trillion yuan, to accelerate infrastructure construction and spur economic growth.

Some experts said the additional quota may be allocated in the fourth quarter, to accelerate fixed-asset investment.