123Third, the central state implemented a tax return system to local governments. After
the reform, central government took 60 % of the total tax income, 20 % of which
would be used for tax returned to spending units. There were three major forms of
tax return: general return, factor return and special allocation.
The tax sharing reform resolved many problems, such as establishing new
relations between state and enterprises, central government and local govern-
ments, and between state and individuals, and stabilizing fiscal allocation relations
between central and local governments. However, though the tax sharing system
expanded the revenue of central government, it did not adjust central government’s
expenditure structures. As a result, the fiscal situation of central government
became better and better, while the fiscal ability of local governments, especially
the county-level governments in poor regions, were further weakened and unable
to meet responsibility of supporting compulsory education.
The second strategy was to move more funding responsibility to county level.
In 1994, the State Council issued “The Opinions on Implementing ‘The Program
of Reform and Development of Education in China’”. It put forward strategies
on funding with several elements. First the salaries of public teachers were paid
from county-level finance. Townships in economically developed areas were also
encouraged to contribute. Second, the salaries of substitute teachers were divided
into two parts. One part was paid by the county and another part was to be paid
from local education surcharges. Third, the overall quota for public funds for
schools lawfully carrying out compulsory education was set by provincial gov-
ernment and counties were responsible for disbursing the funds. Fourth, funds for
building, rebuilding, extending and renovating dilapidated schools and classrooms
were included in the basic construction investment plans of the governments at all
levels. Lastly arrangements were made to use a Special Education Fund to ensure
that poor and remote areas received as much or more per student as the county
average to accelerate the development of basic education.
During this period the system of “local responsibility, multi-level manage-
ment, county-centered and township shared responsibility” was established. This
shifted some responsibility to the county-level government for investment, but
retained the expectation of fund raising from local sources. In practice the sys-
tem remained decentralized with the expectation of significant local fund raising
(Li et al. 2009 ). The “village-centered” (yi xiang wei zhu) or “county-centered and
township shared responsibility” systems both contributed to the expansion of nine-
year compulsory education. Compulsory education in rural areas developed fast.
By 1999, China claimed enrolment rates for primary school-age children of 99 %
and at junior secondary level 88 % (Wang Bingzhao; Shi Kecan, 2009 ).
However this expanded enrolment was being supported from various fees in
addition to taxes on farmers. With the deepening of economic reforms, many inef-
ficient rural non-agricultural industries deteriorated. The revenue raised from this
source diminished and rural debts increased. Economically stressed township gov-
ernments put more of the burden of funding rural compulsory education on farmers
who became a major source of financing. It became clear that the salaries of teach-
ers could not be guaranteed (Zhang 2004 ) and a new arrangement was needed.
6.2 Reform of Management and Fund Guarantee System