The formation of land finance is both related to the financial system and tax structure of China and is closely related to both the objective change of central government and the goal composition of local governments. This paper uses Game Theory Methodology to analyze the earnings function of each main body of the interests and its strategic choice and reveals the intrinsic mechanism and evolution progress of the finance formation of local governments. Research results show that the land finance is easily formed when central government prefers social fairness to choose centralized power, that land finance can not be formed when central government chooses decentralized power to make local governments get stronger incentive to promote local economic development, and meanwhile, the game between local governments and developing merchants depends on the choice of the officials of the local governments. This paper suggests (1) improve the institutional design of tax distribution system, (2)enlarge the penalty on the local governments for illegal expropriation of land, (3)reform the traditional cadre evaluation by GDP.