How Tax-sharing Reform Affects the Quality of Urbanization in China

The fiscal relationship between the central government and the local government and the quality of urbanization are major issues of national importance in the new era. However, not enough attention has been paid to the relationship between the fiscal relationship between the central government and the quality of urbanization, and there is a paucity of literature examining the relationship between the two. In view of this, this paper examines the impact of central-territorial fiscal relationship adjustment on the quality of urbanization in China with the help of provincial panel data from 1979 to 2020 and the tax-sharing reform implemented in 1994. The study finds that, firstly, the tax-sharing reform has increased local government competition as measured by the promotion of local officials, and this finding holds after a series of robustness tests. Secondly, the increased level of local government competition has led to a low quality of urbanization in China, a finding supported by three aspects of urbanization quality (low household population share, insufficient consumer demand and lagging service sector development). The findings of this paper imply that improving the quality of urbanization can be promoted not only by reforming the performance appraisal system of officials, but also by adjusting the fiscal relationship between the central and the local government. This provides useful policy insights for establishing a modern fiscal system and improving the quality of urbanization in the new era.