in an effort to ease widening regional disparities.3The three transfers constituted about 64 percent of total central transfers in 2004. The equalization grant has grown rapidly in size, from Y2.1 billion in 1995 to Y74.5 billion in 2004 (5 percent of total central-provincial transfers) (table 7.1).
Specific-purpose transfers include grants for increasing the wages of civil servants, grants for rural tax reform, grants for minority regions, pre-1994 subsidies, and other ad hoc transfers. About 200 ad hoc grants—termed “earmarked grants”
(Zhuanxiang Zhuanyi Zhifu) by the Ministry of Finance—are used to subsidize a wide variety of spending projects, such as capital constructions and social relief for calamities. In 2004 the largest central-provincial fiscal transfer was revenue-sharing transfers (Y469.5 billion), followed by tax rebates (Y404.97 billion) and earmarked grants (Y322.33 billion). The three transfers accounted for more than 80 percent of total central-provincial transfers.
Total per capita central transfers range widely across provinces (figure 7.2), with Henan receiving the smallest per capita total central transfers (Y646) and Shanghai, China’s richest province, receiving the largest (Y5,079) in 2004 (the average province received Y1,117 per capita). Shanghai received the largest per capita revenue-sharing transfers (Y2,830) and Tibet the smallest (Y81) (table 7.2). The tax rebate was also unequally distributed, with Shanghai receiving the largest rebate (Y2,123) and Jiangxi receiving the lowest (Y126). For obvious reasons, the six coastal provinces (Beijing, Guangdong, Jiangsu, Shanghai, Tianjin, and Zhejiang) did not receive any equaliza- tion transfers. Tibet received the largest per capita equalization transfer (Y705).
General-Purpose Transfers
China has three types of general-purpose transfers: revenue-sharing transfers, tax rebates, and equalization transfers. In 2004 total general-purpose transfers amounted to Y949 billion, about 64 percent of total transfers by the central government.
Revenue-Sharing Transfers
Subnational governments in China receive 25 percent of the proceeds of value added tax (VAT) and 40 percent of enterprise income taxes and personal income tax from the central government. Because the central government determines the tax base and rate and collects VAT and most income taxes, in the provinces these tax revenues should be classified as general-purpose transfers, following the convention in the public finance literature.
Tax Rebates
With the 1994 tax reform, VAT and excise taxes were brought under central tax administration. A program of tax rebates was instituted for these taxes that returned a fraction of the revenues to the province of origin. The provinces were ensured that every province would receive at least the VAT and excise tax revenues it retained in 1993 and that current rebates would equal the previous year’s rebate
T ab le 7.1 Inter g o v e rnmental T ransfers in China, 2003 and 2004
2003 Central-provincial transfers2003provincial/prefecture-county 20042003provincial-prefecture transferstransfersa AmountPercentage ofAmountPercentage of AmountPercentage of AmountPercentage of Transfer(yuan,billion)total transfers (yuan,billion)total transfers(yuan,billion)total transfers(yuan,billion)total transfers General-purpose transfers Revenue-sharing transfersb469.531.6355.630.6231.028.8111.420.6 Tax rebate405.027.2342.429.5166.720.8126.223.3 Equalization transferc74.55.038.03.339.64.930.55.6 Subtotal949.063.8736.063.4437.354.5268.149.5 Specific-purpose transfers Grants for increasing public sector wages91.96.289.97.779.29.968.512.7 132Grants for rural tax reform52.33.530.52.633.04.133.86.3 Grants to regions with large minority populations7.70.55.80.51.70.21.70.3 Pre-1994 subsidies12.60.812.41.118.22.316.53.0 Ad hoc transfersd322.321.7242.620.9149.318.698.218.1 Othere51.43.543.73.884.210.454.410.1 Subtotal538.236.2424.936.6365.645.5273.150.5 Total1,487.2100.01,160.8100.0802.7100.0541.2100.0 Source:Authors’ calculations, based on data from Ministry of Finance. a. Whether a county receives transfers from the provincial or prefectural government depends on whether its province has implemented the “province managing county” reform. b. Revenue-sharing transfers since 2002 include the following shared taxes: VAT, enterprise income tax, and personal income tax. Before 2002 the revenue-sharing transfers reflected only the amount of local VAT revenue. c. The equalization transfer refers to the transitory period grant established since 1995. d. Ad hoc transfers refer to earmarked grants (Zhuanxiang Zhuanyi Zhifu), as categorized in the Ministry of Finance dataset. e. Other transfers include various accounting closing transfers, civil service unit reform subsidies, and uncategorized transfers in the Ministry of Finance dataset.
Figure 7.2 Distribution of Total per Capita Transfers from the Central Government, by Province, 2004
Source:Authors’ calculations, based on data from the Ministry of Finance.
Note:Provincial governments in China receive 25 percent of the proceeds of the VAT and 40 percent of enterprise and personal income taxes from the central government. These shared tax revenues are considered revenue-sharing transfers in this chapter and included in total central government transfers.
0 1,000 2,000 3,000 4,000 5,000 6,000
Province (from lowest to highest per capita GDP)
Yuan
Guizho u Gansu
Yunnan Guangxi
Anh ui Sich
uan Tibet
Shaanxi Ningxia
Jiangxi Hunan Chon
gqing Qin
ghai Hen
an Shanxi
Hainan HubeiJilin
Xinji ang Inne
r Mon golia
Hebei Heilon
gjiang Liaonin
g Shandon
g Fujian Guangdon
g Jiangsu
Zheji ang Tianjin
g Beijin
g Shanghai
plus 30 percent of the growth in VAT and consumption tax revenues (Budget Committee 2002). Algebraically,
where TRt= the tax rebate to a province at year t; VAT= value added tax; and ET= excise taxes.
In 2002 the personal income tax and the enterprise income tax were also brought under central tax administration, and a program of tax rebate similar to the VAT rebate was instituted. Effective on January 1, 2002, all income taxes from enterprises and individuals were shared equally by the central government and provincial governments.4 In 2003 the central government’s share was raised to 60 percent. To promote stability in provincial revenues, an income tax rebate pro- gram was instituted to ensure that all provinces receive income tax revenues that are no lower than those they received in 2001.
TR TR VAT VAT ET ET
VAT ET
t t
t t t t
t t
= + − + −
− −+ −
− −
1
1 1
1 1
1 0 3. ⎛
⎝⎜ ⎞
⎠⎟
⎡
⎣⎢
⎢
⎤
⎦⎦⎥
⎥,
T ab le 7.2 Central Go v e rnment T ransfers , b y Re g ion, 2004
ChinaEastern ChinaCentral ChinaWestern China ItemSmallestLargestMeanSmallestLargestMeanSmallestLargestMeanSmallestLargestMean GDP per4,07842,76812,6149,40542,76819,3517,44913,8939,3764,07811,3767,430 capita(Guizhou)(Shanghai)(Hainan)(Shanghai)(Anhui)(Heilongjiang)(Guizhou)(Inner Mongolia) Total transfers 6465,0791,1177455,0791,3526461,5068837394,9501,075 from central(Henan)(Shanghai)(Shandong)(Shanghai)(Henan)(Jilin)(Sichuan)(Tibet) government General-purpose transfers Revenue-812,8303301792,83061011932416481237152 sharing (Tibet)(Shanghai)(Hainan)(Shanghai)(Jiangxi)(Shanxi)(Tibet)(Xinjiang) transfers Tax rebates1262,1233131722,123523126276175139359194 (Jiangxi)(Shanghai)(Hainan)(Shanghai)(Jiangxi)(Jilin)(Guizhou)(Yunnan) Equalization07053010814541257141705100 transfers(Beijing,(Tibet)(Hainan)(Henan)(Jilin)(Yunnan)(Tibet) Guangdong, Jiangsu, Shanghai, Tianjin, Zhejiang) Specific-purpose transfers Ad hoc 311,657249314131271666122881801,657366 transfers(Guangdong)(Tibet)(Guangdong)(Liaoning)(Henan)(Jilin)(Guangxi)(Tibet) Source:Authors’ calculations, based on data from the Ministry of Finance. Note:Provincial governments in China receive 25 percent of the proceeds of the value added tax and 40 percent of enterprise and personal income taxes from the central government. These shared tax revenues are considered revenue-sharing transfers in this chapter and included in total central government transfers.EQUALIZATIONTRANSFERS
In 1995 the equalization grant, China’s first formula-based transfer, was established in an effort to reduce regional fiscal disparities. The amount of the equalization transfer is determined by three factors: the province’s standard revenue, its stan- dard expenditure, and the share of the standard provincial fiscal gap in the total fiscal gap. Algebraically,
where ETt= the equalization transfer for province i;TET= the total equalization grant available in the budget year; SEi = the standard expenditure of province i;
SRi= the standard revenue of province i;SE= the total standard expenditure of the country; and SR = the total standard revenue of the country. The size of the pool for the equalization transfer (TET) is determined by the central government on an ad hoc basis, subject to annual funding availability.
Standard revenues are equal to standard local own and shared taxes plus the tax rebate plus various grants less remittances to the central government. In the for- mula, the tax rebate, various grants, and remittances to the central government are actual amounts paid by the central government. For each type of tax, the standard tax revenue is determined by multiplying the standard tax base by the standard tax rate. For personal income tax, the standard tax base includes salaries and income of private industrial and commercial enterprises. The actual income tax collected from other bases is regarded as the standard revenue. The income tax base of salaries is estimated using per capita taxable salaries net of exemptions and num- ber of employees. The tax rate of salaries is the local average effective tax rate, adjusted by a regional coefficient. Standard expenditures are measured as total spending of seven sectors, including personal expenditures (salaries and bonus) and office expenditures (vehicles, heating, and other).
The equalization grant has grown very rapidly, from Y2.07 billion in 1995 to Y74.5 billion in 2004 (figure 7.3). Nevertheless, growth in specific-purpose trans- fers has outpaced the growth of equalization transfers.
Specific-Purpose Transfers
The central government administers myriad specific-purpose transfers for advanc- ing central policy objectives. These programs are described in this section.
GRANTS FORINCREASING THEWAGES OF CIVILSERVANTS
The central government raised the wage rate for public sector employees in 1999 and 2001. To implement this policy in the western and central regions, in 1999 it established a special grant to fill the fiscal gap caused by the central policy mandate.
ET TET SE SR
SE SR
i
i i
= × −
− ,
On July 1, 1999, the wage rate was increased by Y120 per capita per month.
It was raised another Y100 per capita per month on January 1, 2001; on October 1, 2001, wages were increased by another Y80 per capita per month. This increase was accompanied by the introduction of a bonus system for civil servants (equiv- alent to about one month’s wages) and by the establishment of a subsidy system for remote areas. More than 700 counties were eligible to receive this grant.
Provinces faced with difficulties paying teachers’ wages in rural elementary and middle schools also received this transfer (Zhang and Martinez-Vazquez 2003).
The grant allocation can be written as
WageGranti= ExpIncreasei⫻BasicExpenditureRatioi
where WageGrant = the grant for increasing wages received by province i;
ExpIncrease= the increase in provincial budgetary expenditure as a result of the cen- tral government’s policy of increasing wages; and BasicExpenditureRatio= the ratio of personal and office expenses to the total disposable revenue of province i.
According to the formula, the size of the grant received by province idepends on the size of the increase in provincial expenditures as a result of the wage policy and the share of basic expenditures (including personnel and office expenses) in the
0 200 400 600 800 1,000 1,200
2004 2003 2002 2001 2000 1999
Year 1998
1997 1996 1995
Yuan (billion)
Revenue-sharing transfers Equalization transfer Total
Tax rebate Ad hoc transfers
Figure 7.3 Central-Provincial Transfers, 1995–2004
Source:Authors’ calculations, based on data from the Ministry of Finance.
Note:Data on revenue-sharing transfers are available only since 1998. Ad hoc transfers (called “earmarked grants” by the Ministry of Finance) account for the major portion of specific-purpose transfers.
province’s total disposable revenue. The increased expenditure is determined by the number of civil servants in province iand the standard of wage increase by the central government. In 2004 total transfers for this purpose were Y91.9 billion.
Grants for Rural Tax Reform
Another transfer was established in 2000 to foster implementation of the central government’s policy of abolishing “three village deductions and five township charges” (xiangtongchou he cun tiliu) and gradually doing away with agricultural taxes. The “three deductions” collected by villages are collective investment, pub- lic welfare funds, and cadre compensation. The “five charges” include charges for rural education, family planning, militia training, and rural road construction and maintenance, as well as subsidies to entitled groups levied by townships. This trans- fer is aimed at filling the fiscal gap caused by the rural tax reform. In 2004, Y52.3 billion was transferred to provincial governments under this grant program.
Grants for Minority Regions
The grant for minority regions was established in 2000 to support economic devel- opment in regions in which large numbers of ethnic minorities reside—regions that tend to be backward economically. The total grant equals a base amount of Y1 billion in 2000 plus a yearly growth rate equal to that of central VAT revenue plus the rebate of 80 percent of the central increased VAT collection in minority areas. This transfer was Y7.7 billion in 2004.
Pre-1994 Grandfathered Subsidies
Pre-1994 subsidies are the contracted fixed grants under the “fiscal contracting sys- tem” during 1988–93.5In both 2003 and 2004, this grant totaled Y12.6 billion.
Since 1994 local governments have continued to remit revenues to or receive trans- fers from the center according to their fiscal contracts in effect in 1993. The amount of transfers is approximately equal to the estimated gap between revenue and expen- diture in the base year. Sixteen provinces (Fujian, Gansu, Guizhou, Guangxi, Hainan, Inner Mongolia, Jiangxi, Jilin, Ningxia, Qinghai, Shandong, Shannxi, Sichuan, Tibet, Yunnan, and Xinjiang) still receive this type of grant.
Ad hoc Transfers
Ad hoc transfers are categorized as “earmarked grants” by the Ministry of Finance.
The number and size of ad hoc transfers have grown over time. Currently, there are about 200 programs, accounting for more than 20 percent of total transfers by the central government (see figure 7.3). These transfers are program based and allocated for specific purposes, such as subsidizing agricultural development, supporting infra- structure construction, assisting backward regions, or providing emergency funding for natural catastrophes. This transfer reached Y322.3 billion in 2004.