Fiscal Incentives and Environmental Infrastructure in China
Resources for the Future Discussion Paper No. 12-36
33 Pages Posted: 22 Oct 2012 Last revised: 2 Aug 2013
Date Written: August 1, 2013
This article provides new evidence that fiscal decentralization has supported economic development by incentiving cities to provide more sewage infrastructure. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that cities with higher fiscal incentives built significantly more sewage treatment capacity between 2002 and 2008. This result suggests that fiscal incentives can play a strong role in the development of city-level infrastructure.
Keywords: China sewage, water pollution, fiscal decentralization, fiscal federalism, tax sharing
JEL Classification: H4, H54, H77, Q53, Q56
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