China forestry taxation and charging system has been evolving from a planned to a market oriented system which in practice is complex, overburdened, inconsistent, and affected by high avoidance and low efficiency in collection. These are disincentives for forest management, and both household welfare and the environment are worse off because of them. Before 1985 government revenue came from controlling the price of timber and the market. After the market opened up, revenues came increasingly from taxes and additional charges on farmers. In the past 7 years, funds from the state fiscal account from forestry development have increased more than 20 times, but misuse of government funds either at collection, or in transfer from central fiscal accounts has resulted from overstaffing in the government sector and poor enforcement. Since 2002, the Chinese government has taken some measures to address these problems: it has eliminated Special Agriculture Product Taxation and illegal charges; decreased the rate of officially approval charges, and promised to eliminate the Agriculture Production Tax within 5 years from 2004. China's case shows that government institutions were the major constraints on reform of forestry taxes and charges reform, and also that full solution of the problems involved will need to go well beyond the forestry sector itself.