The Chinese Communist Party (CCP) is reportedly planning to implement a new local surcharge tax in order to support struggling local governments. According to Chinese media reports, this tax could generate nearly $1 trillion yuan ($138 billion) per year. The decision was made at the CCP’s Third Plenum in mid-July, where it was determined that increasing local independent financial resources and expanding tax management authority would be necessary.
China Business News, a finance media outlet, revealed on July 23 that the plan involves merging urban maintenance and construction taxes, education surcharges, and local education surcharges into a single local surcharge. Local governments will have the authority to determine specific tax rates for this new surcharge.
Since 1985, China has imposed an “urban maintenance and construction tax” that provides revenue for local governments. In 2023 alone, this tax generated 522.3 billion yuan ($72 billion), accounting for approximately 4.5 percent of local general public budget revenue.
In addition to the urban maintenance and construction tax, China also introduced “education surcharges” at the national level in 1986. These charges were later authorized for collection by local governments as well. The education surcharge rate is set at 3 percent while the rate for local education surcharges is set at 2 percent. Both taxes are imposed on work units and individuals who pay value-added and consumption taxes.
Based on estimates from Chinese media sources using these existing rates, combining the revenue from education surcharges with urban maintenance and construction taxes would result in a total of approximately 949.6 billion yuan ($131 billion) per year.
This news has sparked controversy on Chinese social media platforms as experts express concerns about its potential impact on the economy and citizens’ well-being.
Frank Xie, a professor at the Aiken School of Business at the University of South Carolina warns that while this move may help solve financial difficulties faced by local governments in China, it could have detrimental effects overall.
Xie explains that during previous tax reforms implemented by CCP authorities transferred significant rights and benefits to central government entities which resulted in reduced funding for regional administrations. To compensate for these losses many regional administrations began relying heavily on land sales as an alternative source of income; however with declining real estate markets those revenues have plummeted leaving many regions unable to meet their financial obligations including paying salaries without assistance from central government funds
Xie predicts that increasing taxes will only further burden citizens already struggling under economic pressures caused by COVID-19 pandemic restrictions; he believes such measures may lead people towards rebellion against CCP policies
Taiwanese economist Huang Shicong echoes Xie’s concerns stating imposing additional taxes merely transfers wealth ordinary people towards regional administrations thereby reducing spending power among consumers ultimately affecting fiscal system stability long-term
Li Hengqing an economist based United States adds since Xi Jinping assumed power central government’s fiscal powers expanded significantly resulting increased debt burdens faced regional administrations without sufficient funds bailout them out thus necessitating transfer taxation powers various regions However unlike democratic countries where such decisions require approval populace communist China today levying increasing not subject popular consent Li believes encouraging regional administrators attempt resolve fiscal difficulties through raising meaningless potentially leading social unrest
