The Local Land Finance Transformation with the Synergy of Increment and Inventory: A Case Study in China

Abstract

Since 1998, the land finance model based on residential and commercial land transfer revenue has played an important role in Chinese social and economic growth, especially in urban infrastructure construction. With China’s population peak and stable urbanization, the “incremental” land-transfer-heavy development paradigm is unsustainable. At the same time, as a developing country, local governments in China must have enough fiscal revenue to encourage high-quality growth. The transformation of land finance is a practical issue that needs to be explored urgently. This article, which was based on the local government financial balance theory, proposed supporting the optimization of the land finance incremental model with the reform of the property tax system. A local land finance transformation mechanism with increment and inventory synergy was then created. Specifically, to avoid a cliff-like fall in the local government’s land-transfer fee, it was proposed that the land-transfer fee change from the original collection, from ordinary commercial housing to improved housing. The property tax should be levied on the second set of ordinary commercial housing to obtain fiscal revenue from the “inventory”. Concurrently, the fiscal money from property taxes could be utilized to build cheap rental housing or to support housing vouchers for new urban residents and young people.