The Central Economic Work Conference held in December proposed to arrange a new round of fiscal and tax system reform measures. The proposed fiscal and tax system reforms should be in line with the current stage of China's economic and social development.

In 1994, the tax-sharing system was initiated, marking the beginning of a redistribution of tax revenues between the central and local governments. Since then, the central government has continuously refined the framework of the tax-sharing system, including the division of revenues, the delineation of governance and fiscal responsibilities, and the establishment of related supportive mechanisms.

However, there remain some areas of obscurity and irrationality that has resulted in dampened efficiency of resource allocation and financial strain on local government budgets.

The upcoming fiscal and tax system reform needs to better define the roles of the central government and local governments, improve the delineation of governance and fiscal responsibilities between them, and carry out corresponding reforms in the establishment of related supportive institutional frameworks.

The central government's budget is mainly allocated to areas such as national defense and strategic reserves of grain and oil, whereas local governments are responsible for the bulk of expenditures in most other sectors. Local governments account for about 60-80 percent of spending on some critical fields with broad national significance and effects, such as social security and education. During the COVID-19 pandemic, local governments shouldered large amounts of macro-governance and public services, further exacerbating their fiscal burdens and leading to wide revenue-spending gaps.

In some areas, the division of governance and fiscal responsibilities between central and local governments is too vague, characterized by ambiguous boundaries and a lack of unified legal provisions, making it hard for them to be implemented.

Therefore, first, the relationship between government and the market should be further clarified, the boundaries of governance and fiscal responsibilities should be clearly explained, and the role of market mechanisms should be fully leveraged to alleviate the pressure of government spending.

In sectors with a strong public well-being nature, the government should continue to bear the primary responsibility. In quasi-public sectors with higher degrees of marketization and diminishing public well-being attributes, emphasis should be placed on the guiding role of government investment, thereby encouraging deep participation from private capital.

In areas that can be fully addressed by market mechanisms, the government should streamline administration, ease regulations and provide support to market forces, thus reducing pressure on the government while better unleashing the market's role in resource allocation.

Second, we should ensure some spending responsibilities are transferred to the central government, promoting the standardization and legalization of the allocation of governance responsibilities.

For instance, we must continue to refine and implement the existing division of governance and expenditure responsibilities between central and local governments, adjusting and streamlining the specific arrangements for this division to improve practicality.

Some specific governance and spending responsibilities should be transferred to the central government in an appropriate manner, such as those related to the national flow of production factors and market integration, as well as some cross-regional issues.

Legally, we need to define the principles of governance responsibility division in laws and regulations to ensure the stability, effectiveness and sustainability of fiscal authority allocation.

Third, we also need to refine the transfer payment system to maximize its policy effect.

In recent years, the scale of transfer payments has been on the rise, and such increased transfers have been instrumental in mitigating local fiscal pressures. However, an excessive reliance on fiscal transfers can potentially dampen the enthusiasm of local governments and lead to moral hazard issues.

In the short term, it is advisable to further increase transfer payments to alleviate financial pressure on local governments.

And over the medium to long term, it is crucial to improve the system by using scientific assessment and calculation methods to make fund allocations more rational and efficient.

It is also imperative to further deepen reform of the fiscal and tax system at sub-provincial levels to bolster the financial sustainability of local governments.

It is important to ensure that the division of governance and spending responsibilities below provincial levels is formalized and legalized. A dynamic adjustment mechanism should be established from a top-level design perspective to enhance the system's binding efficacy, thereby ensuring the effectiveness and stability of the division.

We also need to improve revenue distribution effectiveness among governments below the provincial level, appropriately transfer tax collection power to lower-level governments, standardize tax revenue sharing and enforce the principle of statutory taxation.

Moreover, there should be a measured transfer of financial resources to sub-provincial governments, including exploring the viability of increasing the tax-sharing proportions for cities and counties. Nevertheless, for provinces that have serious developmental disparities, a certain concentration of financial resources at the provincial level is necessary for the provinces to balance lower-level interregional development.

We also need to scientifically improve the transfer payment system below the provincial level to increase support for underdeveloped areas and grassroots governments.

Last but not the least, we need to further deepen reform of local taxation systems and establish a robust long-term mechanism for local taxes.

China's local tax revenues depend heavily on shared taxes like value-added taxes and income taxes. Meanwhile, taxes that are locally exclusive often feature scattered tax sources, small revenue scale, and challenges in collection and administration.

From the perspective of financial security and tax collection efficiency, it is advisable at this stage to continue with a local tax system primarily based on shared taxes. However, it is recommended to appropriately increase local governments' share of these taxes to ensure local fiscal stability and sustainability.

Over the long term, it is essential to focus on establishing a stable and long-lasting mechanism to ensure local tax revenue viability. Local governments may adjust measures to be in harmony with local conditions and gradually develop a local tax system primarily based on locally exclusive taxes.

We should also investigate the viability of modestly delegating some fiscal authority to local governments, therefore bolstering their financial resources and motivating them to better carry out their respective responsibilities.

It is also crucial to maintain the overall stability of the financial balance between central and local governments when deepening taxation reforms.

Currently, there is a heightened need for the central government to enhance its coordinating role and for local governments to improve the efficiency of their public services. The fundamental stability of the financial structure between the central and local governments is imperative for sustaining fiscal capabilities and macroeconomic regulatory functions.

Reform of the fiscal and tax system should also keep pace with the evolving dynamics and needs in the Chinese economy and society at large.

As the shift to new growth drivers from traditional ones intensifies, emerging industries — led by the digital economy — are poised to become a significant driving force of China's economic growth. Consequently, the new round of fiscal and tax system reform ought to resonate with these new dynamics and growth momentum.

Yuan Haixia is executive dean of the research institute at credit ratings agency China Chengxin Credit Rating Group (CCXI). Wang Yuanhui and Liang Yunxi are researchers at CCXI.

The views don't necessarily reflect those of China Daily.