To address the local debt issue, the Development Research Center offered four recommendations: foster new growth opportunities, accelerate public finance reform, control public spending and establish a hedging mechanism for possible debt risk.

On the subject of public finance reform, the report suggested an expansion of the value-added tax reform to all sectors. The VAT replaces an existing business tax, which went to local governments.

Although VAT reform threatened to reduce local governments' revenue in the short term, it could give a boost to the economy and thus raise future tax revenue.

The report suggested reforming the current VAT-sharing arrangement, raising the local governments' portion to 30 percent from 25 percent.

Kong Shuhong, a public finance professor at the University of International Business and Economics in Beijing, said raising local governments' share of tax revenues was very necessary because of the large disparity between their revenues and their spending responsibilities.

"The central government takes a large portion of the national tax revenue, but its spending responsibility is very limited. Local governments face huge financial pressure, which is why their debts accumulated rapidly in recent years," she said.

The report also suggested imposing a property tax on all homes, which it said would build a solid taxation source for city- and county-level governments.

Few proposals for reforming the tax system have gone that far, with most urging property tax only for newly purchased homes.

"I don't think that proposal is practical, because it faces huge resistance," said Ding Jianchen, a fiscal and financial professor at the university.