Research On Revenue Stability Of Local Governments

Stable revenue is critical for local governments to maintain normal operation,providing public goods and public services for the citizens,and also plays an important role in government macroeconomic regulation.The tax reform in 1994 ended "separated dinnering" type financial management system,the boundaries of the central and local government fiscal income distribution,increased revenue for central governments,and also greatly reduced the revenue of local governments.At present,revenue stability has great practical significance.The unexpected outbreak of COVID-19 and the complexity of the domestic and foreign environmental changes are challenging the fiscal and taxation systems against external shocks and risk ability.Stable revenue can not only enhance the ability of the government’s response to the current and long-term risks,but also stabilize the economy growth,support the development of high quality,and provides a strong and sustainable financial environment to foster a new development pattern.Tax revenue is the primary source of revenue for local governments.The internal economic nature of taxes are quite different.Revenue of some taxes increase quickly in a short time,owing to its close interaction with macroeconomy,revenue fluctuates greatly.There is an interaction effect between tax revenue portfolio and the local economy,which affects revenue stability.When they interact with each other,tax revenue fluctuates with local economic development,problems of tax revenue stability get more serious.Domestic literature pays little attention to tax revenue portfolio,and the impact on the stability of fiscal revenue is relatively scarce,and only focuses on the intuitive judgment,and data is unavailable to test the correlation between them.Most scholars don’t pay much attention to how the tax structure,together with the economic base,influence the stability of the revenue.In order to study the effect of combination of fiscal income tax income stability,this paper measures revenue stability on the prefecture level in our country,with modified HHI which shows the concentration of industry to measure revenue to reflect the characteristics of the different tax portfolios,and conducts empirical analysis.Results show that tax revenue mixed together with economic fluctuation can influence the stability of the local government revenue.When economic development is not stable,regardless of relatively single source of revenue or diversified structure of tax revenue,the interactive effect between economic fluctuation and tax structure increases the volatility of revenue.The more volatile the economic base is,the bigger volatility of revenue gets.When the economy base is stable,the local government may try to expand the channels for revenue,adopting diversified combination of tax revenue by hedging different sources of revenue risk and making revenue more predictable.The tax reform greatly reduced the local fiscal revenue,while local government spending liability didn’t have a simultaneous cut.Fiscal authority moved upwards to central governments but expenditure responsibility moved downwards to local governments.Local government had not much financial revenue to support public goods provision,eventually leading to great fiscal pressures.In 1998,land administration law in our country was revised.The most prominent change of revised law is the subject of land supply changing from local governments’ oligopoly to monopoly completely.Then,in 2000 the housing reform accelerated the development of domestic real estate market,since then land resources became somehow "cash cow" of local governments.Local governments through the transfer of land use right obtained huge extra-budgetary land revenue,or attract foreign investment by transferring land use right at a favourable land price,which had been the "second fiscal budget" of the local government.Although it can relieve the local government public expenditure pressure in short run,but land transferring fees will not solve fiscal pressure of local governments.Excessive dependence on land transferring fees will lead to a "community of interests" between local governments and property developers.It will push up housing price,land price.In that case,the development of the real estate market is tied with public decision-making and any change of the real estate market will affect the macroeconomic fluctuations.What’s more interesting is that local governments will take land resources as a tool of macroeconomic regulation and control via land market monopoly.Local governments adopt "counter-cyclical" land supply strategy to make up general public budget revenue loss,enhancing stability of local government revenue.However,given the highly connection between land finance and economic fluctuations,local governments cannot ignore the potential risks of land finance.Once the land market or housing market declines,excessive dependence on land financing would trigger “domino effect”.After the replacement of business tax with VAT,local government has less revenues,and but its expenditure doesn’t fall correspondingly.Local government often runs out of budget.As big tax cuts in recent years by policies introduced gradually,even if the allocation proportion of value-added tax revenue between central government and local governments will remain 5:5 in transition period,but the stability of local taxes can’t be guaranteed.Tax revenue takes up a great share of local government revenue.The change of the combination of tax revenue,not only affects the stability of local government revenue,but also makes it uncertain about whether local governments are able to provide public goods and services.Helping local governments out of financing plight is very important in the fiscal relations framework.It involves improving the local government tax system,optimizing tax structure,appropriately increasing the proportion of direct tax,promoting the coordination between different tax effect,strengthening the local financial resources,and meeting basic public demand.Therefore,it’s advisable to take property tax reform as a breakthrough to enhance revenue stability of local governments.This paper tries to provide simulation analysis on the element of property tax design,which will strengthen the local government revenue stability,and make financing going smoothly.By setting different scenes in term of tax rate and housing price,this paper simulates how property tax revenue will response.It includes four different tax-base designs,non-redemption,deduction on first household property,deduction by certain areas of property and deduction on certain value of property.By comparing stability of different schemes,the paper proposes some suggestions to enhance the revenue stability of local governments.This paper mainly analyses the stability of different revenue resource from the perspective of public sector.Some innovation of this paper are shown in the following aspects.(1)Research perspective: Different from previous literature,this paper focuses on stability of China’s land finance and real estate tax reform and provides a systematic empirical analysis from the perspective of public sector for the first time.(2)Research content: Based on the revenue source of local government that includes tax revenue,supplementary revenue by land finance,and property tax revenue which will be carried out soon,this paper separately analyses these contribution on the stability of the revenue and the mechanism as well.Tax revenue and land finance are closely related.Land related revenue has always been complementary of tax revenue,especial when the economic is in downturn,local government can’t make the budget balanced,they always turn to loose land supply to gain a large sum of land transferring fees.A lump sum of land transferring fees is like one-time rent,not sustainable in the long run with great fiscal risk.Property tax is mainly targeted to unmovable real estate so its tax base is relatively stable.As long as the real estate market goes smoothly,local governments will gain relatively stable property tax revenues.Compared with previous studies,this paper not only provides a qualitative analysis,but also gives a more outstanding innovation on empirical analysis,further verifies how the three sources of revenue influence on revenue stability of local governments.It’s conducive to the performance of the fiscal functions of local government,and enhance governance.(3)Research methods: in order to measure revenue stability,the combination of tax revenue,stability of the real estate tax,etc.,this paper uses the unit standard deviation method,HHI,revised HHI,and adopts IV estimation,GMM estimation,fixed effects models and POL model,simulation calculation,to study the stability effect of difference revenue sources.