Fiscal Institutions and

Provincial and local (hereafter “local”) governments in China play an im-portant role in the overall economy. To begin with, local budgetary revenue in recent years is around 8 percent of GDP, extrabudgetary revenue (largely income from land) comes to another 3 percent of GDP, budgetary expen-ditures are close to 14 percent of GDP, and extrabudgetary expenditures add another 2.5 percent of GDP (see table 8.1). This scale of activity is broadly comparable to that of state and local governments in the United States, where own tax revenue is around 13 percent of GDP and expenditures are 16 percent of GDP. Local governments in both settings have primary responsibility for education, local infrastructure, and local public services. The similarity largely stops there, however. In the United States, local governments are mainly fi nanced by property taxes and user fees, and state governments by a combination of personal income taxes and sales taxes. In China, until 1994, local governments were mainly fi nanced through a tax on the profi ts and sales of nonstate fi rms. Since then, they have received