Taxes and Small-town Development

The county receives a variety of taxes, which it can use for rural urbanization. Although these taxes change constantly, in 1987 they included public-facility fees (gong yong shiye fei ), peasant income taxes, and local real estate or land use taxes. The income tax, paid by all rural enterprises, could take as much as 55 percent of their industrial income. Five percent of these funds are earmarked for urban construction. Recent findings show that a sales tax (or value-added tax applied to all goods produced in rural enterprises) supplies county governments with much of their funds (Walder 1989). However, it is not known for certain how this tax affects factories owned by county-towns or townships.

Still, because these funds are usually distributed to county authorities for investment in town construction, the county can invest the great majority of these funds in the county seat, not in county-towns. Although central and provincial governments stipulated that local industrial and commercial surtaxes, public utilities surtaxes, and real estate surtaxes should be used for small-town construction, "the funds they provide are too small to be of any help" (Fei 1986, 83–84). In Suzhou municipality, the sum from these three sources amounted to two million yuan, which was divided among eighteen county-towns. "But the greater part of the sum is spent on construction in county seats, while other towns get only a few tens of thousand yuan each. Many leaders of county-towns say their share is not enough even for repairing unsafe buildings in the town" (Fei 1986, 83–84). In other cases the county government keeps most of the funds for its own administrative costs. Factories in Qingyang town, a county seat, paid the county 13 million yuan in 1984 taxes, but between 1981 and 1984 county appropriations totaled only 380,000 yuan, less than 100,000 yuan a year. Although the county was expected to give the town the "three types of appropriations (san xiang bokuan ), for many years this has been empty talk" (Zhao and Zhang 1986, 325). Moreover, because the county wanted its taxes first, some of the town's projects could not get off the ground. In one instance, county officials refused to let two enterprises—which, as beneficiaries of a town-run bridge-building project, had to contribute to it—draw their 10,000 yuan contribution out of their pretax profits. State taxes had to be paid first, even though their after-tax profits were insufficient for completing the project. After three years of wrangling, the money had still not been appropriated nor had the bridge been completed (Zhao and Zhang 1986, 325). The county is extremely judicious in distributing this most popular of tax breaks.

Similarly, all enterprises owned by the county-seat government in Wujiang county pay the county government an urban-construction protection fee (chengshi jianshi weihu fei ) which is 7 percent of their pretax income. Before 1987 the county reinvested only 70 percent of these funds in the county seat, using the remaining 30 percent in other towns or projects. Thus the county used taxes and urban development to redistribute funds within the county. However, since 1987, when the county began a major project to expand the county seat, the county stopped investing in the building up of the other towns. Even in Jiangpu county, where the county government supplied the county seat with funds for administering the town—in 1985 the county gave 120,000 yuan and in 1986 it gave 260,000 yuan—much of this money came from taxes imposed on the county seat's own factories.

Yet the new "finance responsibility system," which is intended to make county-towns and townships collect taxes more aggressively and be fiscally more responsible and autonomous (ZGNCJJ 1987b), may increase county-town independence, particularly for wealthy towns that can meet their quotas. But in the case of Tangquan town, Jiangpu county officials appear to be holding onto 5 percent more funds than they should be. In summer 1988 a Tangquan official complained to a county cadre that the county had only returned 10 and not 15 percent of the expected funds. Even when the county official reminded him that the county had helped build the drinking-water system, the county-town manager argued that development assistance was separate from a policy that gave county-towns more funds for their own use. As we can see, the county was willing to invest in the town, but it tried to keep surplus funds in its own hands and thereby determine the locus of investment, rather than give the funds directly to the town. This way it could insure that most funds went to develop the county seat, where its bureaucrats live and work. Clearly the system of financial responsibility should put more taxes directly in the county-town governments' hands and help them invest in their own urban infrastructure. Yet one can feel confident that the county will use its authority to keep in its own hands as much as possible of the surplus taxes collected by the town.