The development of the "best" fiscal arrangement among levels of government has rarely been as widely discussed and debated as it has been in the past five years (e.g., the devolution of the Soviet Union, the federalism in the U.S., decentralization in the Baltics, the breakup in the Balkans). Among other factors, enhanced technical abilities of local governments to provide services, and a worldwide trend toward government have contributed to a belief in the increased potential of fiscal decentralization.

In many countries, the emphasis has been to increase the budgetary share of the local governments. This been the case in the countries of the former Soviet Union. (Bahl and Wallich, 1994; Bahl and Wallace, 1995; Martinez- Vazquez and Wallace, 1995) In China, however, the direction of reform has been different. Intergovernmental policies in China appear to be aimed at granting the central government a larger share of revenue. In the midst of a significant change in its tax policy and tax administration (in 1994), China significantly restructured the relationships among levels of government. This change and its potential impacts are the focus of this paper.