China’s Cash-Strapped Local Governments Look to Boost Funds

  • Proposals include handing welfare obligations to Beijing
  • Transfering sales taxes, new property levies also discussed

A motorcyclist carries goods over a bridge in Shanghai.

Photographer: Peter Parks/AFP via Getty Images

China’s cash-strapped local authorities are scrambling for ways to rebuild their fiscal firepower as a tax overhaul has seen them lose out to the central government and efforts to clear unsold apartments prompts many to restrict land sales for new development.

Proposals include turning over pension commitments to Beijing, redistributing sales-tax revenue from the central government to local coffers, or allowing provinces to start applying new levies on housing, according to proposals by former officials and tax experts in Beijing. The Ministry of Finance is in the midst of an overhaul of the nation’s tax system, with details on how local governments can boost revenue anticipated in coming weeks and months.

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Meantime, the local economies hardest hit by revenue shortfalls are falling back on land sales to plug the gap, potentially worsening their long-term housing problems by adding to excess supply. The northeast rust-belt provinces of Heilongjiang, Liaoning and Jilin are most reliant on land sales, a Bloomberg provincial risk tracker shows.

The government has orchestrated a debt swap for local governments to convert expensive loans into bonds, with 5 trillion yuan ($764 billion) of such borrowings maturing this year. Provincial authorities play a vital role sustaining China’s investment-led economy by helping fund infrastructure projects, and are an important backstop for consumption as the provider of pensions and welfare.

With local officials relying more on Beijing’s assistance, "their sense of uncertainty has grown, making them more reluctant to plan for long-term development of their local economies," said Xu Shanda, former deputy director of the National Taxation Administration.

Still, regional and local governments’ fiscal and economic position improved in the first quarter and should continue to do so in coming quarters as the real estate market and macro economy stabilize, Moody’s Investors Service wrote in a report dated Monday. Provinces heavily exposed to excess capacity industries such as steel and coal are lagging behind, it said.

Here are three of the more prominent proposals put forward:

  • Consumption Tax: Turning over central government revenue from taxes on consumption goods such as cigarettes, alcohol and cosmetics to local authorities would be an "adequate and sustainable" supplement to help shore up the local revenue shortage, according to Gao Peiyong, a senior tax researcher at the Chinese Academy of Social Sciences, a state-backed think tank that advises the government in Beijing.
  • Property Tax: Policy makers are also weighing new levies on real estate owners and are running trial programs, with a levy based on property values tried in Chongqing and transaction taxes applied in Shanghai. The National People’s Congress wrapped up a draft law on real estate tax last year, but it was halted on concern it would dent sales and slow a reduction of excess housing inventories in smaller cities. Now isn’t the best time for new property taxes as policy makers are already having to juggle the need to cap prices in first-tier cities while removing restrictions in smaller places to try to spur sales, said Qiu Xiaoxiong, former deputy director of the National Taxation Administration.
  • Social Security Switch: Another alternative is for the central government to take on a bigger slice of provincial social security obligations. Wei Jianing, a researcher from the Development Research Center of the State Council -- a key advisory body to China’s cabinet -- said the benefits of such a move would go beyond just easing local fiscal burdens. Central government payments of welfare entitlements would also facilitate city-to-city migration and urbanization, since currently pension and medical reimbursement entitlements are based on birth place rather than residence. Greater labor force mobility would be a big productivity driver and is a stated aim of China’s reform blueprint.

— With assistance by Yinan Zhao

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