The impact of a tax cut reform on land finance revenue: Constrained by the binding target of construction land

ABSTRACT

Over the past 2 decades, China’s local governments have tended to increase revenue through a large number of land sales when experiencing fiscal stress, i.e., generation of land finance revenue. However, this revenue source is inherently unsustainable. This paper examines the impacts of a major tax cut reform in China, namely, the Business Tax to Value-Added Tax Reform (B2V), on local governments’ land finance revenue and whether local government reliance on land finance revenue is constrained by planning restrictions. We use data from 232 prefecture-level cities in China and conduct an econometric analysis to examine these impacts. The major findings are as follows. First, B2V has led to a significant increase in local government land finance revenue. Second, local governments did not respond to B2V to increase land finance revenue before B2V implementation. Third, the impact of B2V on land finance revenue is constrained by the binding target of construction land; the constraining effect of the binding target became evident after 2013. Policy implications are discussed based on the research findings.

Notes

1. The narrow definition of land finance revenue, which is the object of analysis in this paper, is the generation of extra budgetary revenue for local governments through land sales or transfers. The broad definition of land finance revenue includes land-related taxes and fees.

2. The binding target of construction land is an important land use planning quota for constraining the expansion of construction land, which is the amount of construction land that the central government allows local governments to use during a planning period (Zhou et al., 2017).

3. China’s “National General Land Use Planning Outline” stipulates the scale of construction land (the binding target of construction land) that can be used by the entire country and each province during a planning period.

4. China’s Ministry of Finance and China’s State Administration of Taxation, Circular on Printing and Distributing the Pilot Proposals for B2V, Caishui [2011] No. 110 (Circular 110).

5. The State Council of China, Circular on Printing and Distributing the Transition Plan of Adjusting the Central and Local VAT Income Distribution after B2V was Fully Implemented, Guofa [2016] No. 26 (Circular 26).

6. A detailed timeline of B2V implementation in pilot regions is shown in Table 1.

7. The long-term planning indicators in the “National General Land Use Planning Outline (2006–2020)” reflect the 2020 target, the short-term planning indicators reflect the 2010 target, and annual planning indicators are not disclosed.

Additional information

Funding

This work was supported by the Major Program of the National Social Science Foundation of China (Grant No. 17ZDA076), the National Natural Science Foundation of China (Grant No. 71673140, Grant No. 71503117 and Grant No. 71603120), the Program of Introducing Talents of Discipline to Universities (Grant No. B17024), and the China Scholarships Council (Grant No. 201706850078).

Notes on contributors

Jian Wang

Jian Wang is a postdoctoral researcher at College of Public Administration, Nanjing Agricultural University, where he earned his PhD from the Department of Land Resource Management. He was a Joint PhD student in the Department of Agriculture, Food, and Resource Economics, Michigan State University from 2017 to 2018. His research focuses on land economics, land management, land finance revenue and local public finance. His papers have been published in Land Use Policy and some other Chinese journals.

Mark Skidmore

Mark Skidmore is a Professor in the Department of Agricultural, Food, and Resource Economics and Department of Economics at Michigan State University, where he holds the Morris Chair in State and Local Government Finance and Policy and directs the North Central Regional Center for Rural Development. Recent research areas include state and local government tax policy, urban decline and renewal, and the economics of natural disasters. His work has been funded by the USDA, Fulbright Program, the Lincoln Institute of Land Policy, the National Science Foundation, the Urban Institute, USAID, etc. His papers appear in Journal of Urban Economics, Regional Science and Urban Economics, Land Economics, and Real Estate Economics, among others. His research has been cited in prominent news outlets such as the BBC, Boston Globe, China Post, CNNMoney, Economist, Forbes, MSNBC, Newsweek, The New Yorker, New York Times, PBS News Hour, Reuters, and the Washington Post.

Qun Wu

Qun Wu is a Professor in the Department of Land Resource Management, College of Public Administration at Nanjing Agricultural University, where he directs the Real Estate Research Center. His research focuses on land economics, land resource management, land market, urban and rural development, and real estate management. His work has been funded by the National Social Science Foundation of China, the National Natural Science Foundation of China, the Ministry of Education, China Land Surveying and Planning, Jiangsu Provincial Department of Land and Resources, and Jiangsu Provincial Department of Science and Technology. His papers have published in journals such as Land Use Policy, Habitat International, Journal of Cleaner Production, Growth and Change, Journal of Environment Planning and Management, and many other Chinese journals.

Shu Wang

Shu Wang is a fixed-term Assistant Professor in the Department of Agricultural, Food, and Resource Economics at Michigan State University. Her research focuses on institutional and economic factors that affect fiscal conditions of local governments and the sustainability of service provision. She is also interested in organizational behavior in the public sector, and how public organizations innovate differently than their private counterparts. Her papers appear in American Review of Public Administration, and Public Administration Quarterly, among others.