Abstract: At present, China’s finance has entered a new stage of“expenditure growth rate being greater than income growth rate”from the stage of“income and expenditure double high growth”; the effects of income reduction and expenditure increase are overlaying, and local government finances are under pressure. The findings of the study indicate that China’s local finance shows a weak sustainability; tax decentralization can help to enhance the sustainability of local finance, the impact of decentralization of value-added tax, corporate income tax and personal income tax on local fiscal sustainability has a heterogenetic nature, the decentralization of corporate income tax and personal income tax will significantly enhance local fiscal sustainability, while the impact of VAT decentralization on local fiscal sustainability is not significant. Therefore, we should pay full attention to local fiscal sustainability, meanwhile, we should monitor, prevent and resolve local fiscal risks. In order to promote local fiscal sustainability, we have to consider the incentive effect of different tax decentralization when dividing intergovernmental taxations. We should also continue to take corporate income tax and individual income tax as the shared tax, and increase the proportion of local sharing appropriately.

Key words: local finance; fiscal sustainability; tax decentralization; income tax; value added tax