China’s local finances have long relied on land transfer income. However, with the recent downturn in the Chinese real estate market, this “cash cow” has withered, plunging local governments into a severe financial crisis. The Chinese Communist Party has recently pushed for “reforms” in local surtaxes, described by official media as “expanding local tax sources and addressing local financial difficulties.” Some analysts who have long monitored the Chinese economy believe that this reflects intensified fiscal pressure, leading the government to a stage where it has no choice but to “grab money.” Against the backdrop of economic pressure, related costs are expected to further shift onto enterprises and the general public.
In a report recently published by the Chinese Communist Party titled “Report on the Implementation of the Central and Local Budgets in 2025 and the Draft Central and Local Budgets for 2026,” it calls for expanding local tax sources and promoting the reform of local surtaxes.
According to financial news outlet “Caijing,” this is in order to address local financial difficulties and introduce new local taxes planned by the central authorities.
The 20th Third Plenary session of the Chinese Communist Party, held in July 2024, for the first time discussed merging urban maintenance and construction tax, education fees surcharge, and local education surcharge (referred to as one tax two fees) into a local surtax, authorizing local governments to determine specific tax rates.
Officials claim that this move will “enhance the stability of local tax sources and grant autonomy in tax rates to local governments.” Based on estimates by “Caijing” and citing data from the Ministry of Finance of the Chinese Communist Party, the combined scale of the “one tax two fees” is close to one trillion yuan.
Superficially, this new tax type is not an arbitrary addition, but an integration of existing taxes and fees. However, in the view of some analysts, the key change lies in the nature of collection: while there used to be some flexibility in the execution of related costs in the past, once transformed into a formal tax type and overlapping with a stricter collection system, the enforcement intensity may significantly increase. The mentality becomes “not only collection-oriented, but also thorough and strict.”
Financial blogger “Huihu” pointed out that this change fundamentally signifies an increase in the rigidity of collection, representing another form of “forced bloodletting.” Previously, some taxes and fees could be avoided through discounts or delayed payments, but once the local surtax is independently established, the enforcement strength will greatly escalate. Building upon a 13% value-added tax, the local surtax could impose an additional 3% to 5% burden, indicating that small traders and private enterprises will face a sudden surge in operating costs, potentially leading to insolvency.
With 370,000 followers, YouTube blogger “Wuyue Sanren” analyzed from a financial structure perspective that this trillion-yuan tax reform fundamentally adjusts the division of financial responsibilities within the upper echelons of the Chinese Communist Party. He stated that this essentially provides the central government with a tool to allow local authorities to seek funding on their own in the market.
He believes that this empowers local governments with the authority to engage in “legitimate robbery.” If local governments rely on coercive tax collection to fill their debt holes due to financial shortages, it will ultimately be small businesses and ordinary consumers who will bear the brunt of the consequences.
During the National People’s Congress in China this year, Chinese Premier Li Keqiang stated in the government work report that the main expected goal for China’s development in 2026 is an economic growth of 4.5% to 5%. This is the first time in decades that the Chinese Communist Party has set the GDP growth target below 5%.
The government work report also proposed issuing 1.3 trillion yuan in ultra-long-term special national bonds; re-issuing 300 billion yuan in special national bonds; and arranging 4.4 trillion yuan in local government special bonds for major project construction, debt replacement, and debt resolution.
At the time, “Huihu” stated that these debt arrangements reveal a huge gap between central and local finances. Additionally, the downward trend in real estate poses immense pressure on the financial system, especially on large commercial banks. The government needs to respond to sudden problems like a “firefighter.”
From the data, it is evident that the core support of local finances over the past twenty years has indeed come from land transfer income. “Wuyue Sanren” noted that the real “core income” of local governments is not from taxation, but from land sales. In 2019, national land transfer income amounted to 7.4 trillion yuan, in 2020 it was 8.4 trillion yuan, and in 2021, it reached a peak of 8.7 trillion yuan. By 2022, national land transfer income had decreased to 6.7 trillion yuan, a 23% drop. In 2023, national land transfer income further decreased to 5.8 trillion yuan, and in 2024, it continued to decline to 5.1 trillion yuan.
“Huihu” indicated that by 2025, national land transfer income had shrunk to just over 2 trillion yuan, a drop of nearly 70%. More crucially, a substantial portion of the remaining income is not from actual market transactions but from “internal trading” between central enterprises, state-owned enterprises, and urban investment companies – essentially a self-circular flow incapable of providing genuine cash flow.
In essence, the “money-printing machine” that had supported local finances in the past has broken down. However, expenditures have not decreased. Debts need to be repaid, infrastructure needs to be maintained, and the vast bureaucratic system must be sustained. As a result, the fiscal deficit is not temporary but structural, continually expanding.
He believes that in the current context, local surtax is viewed as an alternative arrangement to the land finance system.
Behind this tax structure lies the fundamental issue of the local financial structure. Huihu analyzed that local finances not only rely on land but also bear massive debts, a vast administrative system, and the implicit risks brought about by the real estate bubble.
Caijing also pointed out that since the transition from business tax to value-added tax in 2016, local authorities have lost their primary tax type. Coupled with economic downturn, a sluggish property market, external trade impact, and reductions in taxes and fees, multiple factors have exacerbated the financial deficit.
Both bloggers highlighted that this so-called reform will have a particularly direct impact on small and medium-sized enterprises and the middle class, implying that they will passively bear the cost of “filling the gap.”
“Wuyue Sanren” believes that from a holistic standpoint, the local surtax is not merely a tax system optimization but a means to supplement insufficient revenue through heightened collection in the backdrop of an expanding fiscal deficit, with the ultimate cost shifting onto small businesses and ordinary individuals.
Huihu, through numerous examples, revealed that the wealth of the Chinese middle class has long been depleted through property depreciation, financial missteps, and stock market turbulence. The arrival of the local surtax is nothing short of adding insult to injury.
As businesses face rising costs and squeezed profits, they are forced to lay off employees and cut expenses. Meanwhile, stagnant or decreasing incomes for residents further strain their consumption capability. Economic contraction and employment difficulties from such policies will only compound the pressures on people’s livelihoods, rather than alleviate them.
More critically, this fiscal burden-shifting masks the massive waste present in real estate and infrastructure investments. Huihu pointed out that historical issues in the real estate and construction sectors are still casting shadows. He cited research data indicating that of 142 cities across the country, there are 1779 unfinished real estate projects in new cities and districts developed after 2000, occupying a total area of 164 square kilometers, wasting 485 million tons of construction materials, resulting in direct economic losses of $347 billion, with homebuyers losing $153 billion. In other words, behind GDP growth lies significant wealth evaporation and resource waste, and the local surtax is simply an attempt to shift these losses onto the general population.
Both bloggers agreed that these accumulated historical problems will not disappear with tax adjustments but may be reallocated through a new collection system.
They both asserted that the local surtax is a “trial of unfair wealth redistribution speeding up in society” – the larger the fiscal deficit of local finances, the heavier the burden on ordinary people.