With local governments facing financial constraints, the Chinese Communist Party has made the reform of local surcharges and consumption taxes a top priority. In a report by mainland media on March 31, this move was promoted as aimed at “enhancing the financial self-renewal capacity of local governments.” However, imposing taxes on top of existing tax bases has been widely interpreted in the market as a “tax on top of tax.”
Against the backdrop of China’s economic slowdown, the diminishing benefits from real estate, and the increasing pressure of local debts, unfair tax bases will become a typical manifestation of the Matthew Effect in the field of finance and taxation. This is one of the deep-rooted problems in today’s Chinese economy and reflects the dual game between the central government and local governments in terms of finance and power.
One of the core measures of the current so-called fiscal tax reform is to combine the previous urban maintenance and construction tax, education surcharge, and local education surcharge into a single “local surcharge,” giving local governments the authority to set tax rates autonomously.
Although this is not a new tax type, from the perspective of system implementation, it means that local governments can impose taxes for a second time on core tax types (such as value-added tax and consumption tax), creating a new source of revenue.
This mechanism highlights the current financial difficulties of local governments. After the failure of land finance, local governments urgently need to find stable alternative sources of income. However, this “self-renewal” method is not achieved through local economic development but gives the public a sense of being “squeezed to the bone.” It presents a clear dual attribute, serving as both fiscal decentralization and an adjustment to the tax burden structure.
Another key change is that the central government has decentralized the setting of local surcharge tax rates. However, under the influence of the Matthew Effect, this may become an amplifier of regional development differentiation.
The Matthew Effect refers to the phenomenon where the strong get stronger and the weak get weaker, creating a social polarization where advantages accumulate for some while disadvantages deepen for others. The term was proposed by American sociologist Robert Morton in 1968 and originates from the New Testament Gospel of Matthew.
e economically stronger eastern regions of China, such as Zhejiang and Jiangsu, with vast value-added tax bases and mature industrial systems, can still generate substantial fiscal revenue even with lower local surcharge rates. This allows them to maintain relatively high levels of public services, further attracting capital and talent inflows.
In contrast, regions in northeastern and northwestern China face significant structural challenges. Lowering tax rates to attract investment may lead to further revenue contraction, while raising tax rates to increase fiscal revenue could exacerbate business outflows. This dilemma can easily evolve into a negative cycle.
Thus, the local surcharge system may objectively strengthen the Matthew Effect of “the strong get stronger and the weak get weaker,” further widening regional development disparities through fiscal tax mechanisms.
Concurrently with the local surcharge, adjustments are being made in the collection process of consumption taxes. According to official policies, some consumption taxes will gradually shift from production processes to wholesale or retail segments, and will be transferred to local governments.
This change, from a geographical perspective, reshapes the sources of local fiscal revenue. In the past, consumption taxes were mainly concentrated in the production areas, making some industrial cities significant fiscal hubs. However, tax sources will now shift more towards consumption areas. This means that cities with large populations and strong consumer power will become the primary beneficiaries.
For example, large urban clusters such as the Yangtze River Delta, the Pearl River Delta, and the Greater Bay Area can gain continuous incremental fiscal revenue through high-income groups and active consumer markets. On the other hand, medium to small cities focused on processing and manufacturing, with population outflows, may face a loss of tax revenue. Population outflows and single-industry regions face a dual pressure of declining fiscal self-sufficiency and rising financing costs.
While redistributing some fiscal powers, the central government is still attempting to maintain the stability of the system and control over local governments.
Due to the consecutive decline in the Chinese economy, on July 30, 2018, the Central Political Bureau’s meeting for the first time proposed the “Six Stabilities”: stabilize employment, finance, foreign trade, foreign investment, investment, and expectations.
On April 17, 2020, the Central Political Bureau introduced the “Six Guarantees”: guaranteeing employment for residents, basic living standards, market entities, food and energy security, stability of industrial and supply chains, and grass-roots operations.
Then, at the 2022 Central Economic Work Conference of the Chinese Communist Party, the “Six Stabilities” and “Six Guarantees” were transformed into “Three Stabilities” and “Three Guarantees”: “maintain stable growth, employment, and prices, effectively prevent and defuse major risks”; “increase the intensity of central transfer payments to local governments, promote fiscal power downscaling, and ensure the stability of grass-roots ‘Three Guarantees’ work.”
In the discourse system of the Chinese Communist Party, any change in expression indicates problems in the relevant areas. In the above statements from these decision-making meetings within the Party, it is evident that financial constraints and crises may have already emerged.
In recent years, the central government has been strengthening fiscal centralization by collecting revenue from major tax types, while transferring responsibilities for education, healthcare, social security, grassroots “stability maintenance,” and infrastructure expenditures to local governments. This structure of “centralization of financial power, decentralization of administrative power” has long placed local finances in a state of mismatched revenues and expenditures. Local officials bear the pressure of financial assessments and governance from the central government on the one hand, while facing the real constraints of grassroots society and public service demands on the other, creating a typical “dual squeeze” situation, leading to dissatisfaction with the central government and a tendency for local officials to be sluggish and neglect their duties.
Simultaneously, through the transfer payment system, the central government redistributes local finances, and the performance of local governments often directly impacts the scale of the transfer payments they receive.
According to official data, this situation remained apparent in 2025. According to a report released by the Chinese Ministry of Finance, in 2025, local general public budget revenue was 22.40074 trillion RMB, of which the scale of central transfer payments to local areas reached 10.192514 trillion RMB.
In other words, nearly half of local fiscal revenue relies on central transfer payments. This high level of dependency further strengthens the central government’s control over local fiscal resources.
The 2026 tax reform by the Chinese Communist Party is superficially about tax type integration and adjustments in the tax collection process, but substantively, it is a part of the redistribution of finance and power. Against the backdrop of China’s economic slowdown and high debt, this has become an inevitable choice for the Party to maintain financial operations.