"To reshape the fiscal relationship between central and local governments is also to redefine the boundaries of the administrative power in the market. The function of China's fiscal system should change from government finance to public finance," she said.

The first task for the government is to establish a social security system, while economic regulation is only the secondary task, Tang said.

"In the past, the fact that expenditures of local governments were much larger than those of the central government is evidence that the government had taken the market's job," she said, explaining that social security expenditure should be carried out by the central government, because it ought to benefit the entire country equally.

Govt steps on fiscal pump

Fiscal reforms to ease local govt debt pressure

For example, she said, although the resource tax on coal is mostly collected from Shanxi province, it should be used to benefit people nationwide.

In the meantime, Tang said, less expenditure also will ease local governments' debt burdens, which have become a major challenge to world's second-largest economy as more local government loans are set to mature in the next two to three years.

According to the latest official data, China's local government debt amounted to 17.9 trillion yuan by the end of June 2013.

"These borrowings are the result of too many expenditures shouldered by local governments," Tang said.

But she also pointed out that the evaluation system for local officials should be modified.

Sun Lijian, director of the Financial Research Center at Fudan University, said if GDP growth is still the assessment criterion, local officials might raise more funds using the "shadow banking" system, which incurs fewer taxes.

The pursuit of larger fiscal power by local authorities has already resulted in a rise in arbitrary fines and confiscations.

In 2013, China's non-tax government revenue grew by 12.1 percent, two percentage points faster than the growth of regular government revenue.

Jia Kang, director of the Institute for Fiscal Science Research under the Ministry of Finance, said one way of solving the problem could be to let local authorities decide the rate of some local tax items.

For example, the rate of property tax could vary in accordance with the development of the property market in each region, he said.