The Third Plenary Session of the Chinese Communist Party (CCP) recently announced several tax-related decisions. Among them, the introduction of the “local surcharge tax” will authorize local governments to determine specific applicable tax rates; it will also promote the relocation of consumption tax collection points and “gradually lower the taxes at the local level”. Former officials within the CCP system have stated that after the collapse of land finance, local CCP governments will inevitably exploit the acquired tax management authority to levy excessive taxes on the people; while the consumption tax will be only a drop in the bucket for local governments.
The “Decision” of the CCP’s Third Plenary Session proposes merging the urban maintenance and construction tax, education surcharge, and local education surcharge into the “local surcharge tax”, authorizing local governments to determine specific applicable tax rates within a certain range.
The urban construction tax is a type of local tax with revenues going to local governments. According to data from the CCP’s Ministry of Finance, the urban maintenance and construction tax generated approximately 523 billion yuan (about 72 billion US dollars) in 2023, accounting for about 4.5% of local general public budget revenue; the education surcharge and local education surcharge are government funds, not tax revenues. Based on the total value-added tax and consumption tax revenues in China in 2023 of approximately 8.545 trillion yuan (about 1.2 trillion US dollars), calculated at a 5% rate for education surcharges, the combined income of the two is estimated to be around 427.3 billion yuan (approximately 58.9 billion US dollars). Adding the urban construction tax, the total income of the three taxes to be merged in 2023 is approximately 949.6 billion yuan (about 130.9 billion US dollars).
Regarding the merging of the three taxes into the “local surcharge tax”, Tian Zhiwei, Vice Dean of the Institute of Public Policy and Governance at the Shanghai University of Finance and Economics, mentioned that the impact on local financial revenue may not be significant, but granting local tax management authority can enhance the enthusiasm of local governments to strengthen financial capabilities.
Du Wen, former legal consultant to Hu Chunhua and former executive director of the Legal Consultation Office of the Inner Mongolia Autonomous Region government, stated, “With local debts already exceeding 30 trillion yuan (about 4.1 trillion US dollars), the local debt crisis is imminent, and all local governments are seeking money from the central government. The central government is simply unable to cope, so it has passed the impending explosion of local debt catastrophe to local governments, and then delegated authority to local governments to excessively collect various taxes and levies from the people, meaning that the massive local debt will have to be repaid by the people.”
How much local debt does the CCP government have? The CCP has never openly disclosed this, making it difficult for outsiders to gather accurate data. In February 2023, the International Monetary Fund estimated that by the end of 2022, the hidden debt of CCP local government financing platforms totaled 66 trillion yuan (about 9.14 trillion US dollars). Goldman Sachs estimated that including the implicit borrowing of thousands of financing companies set up by various provinces and cities, the total government debt of the CCP was about 164 trillion yuan (approximately 22.7 trillion US dollars).
Furthermore, the financial report for the first half of 2024 issued by the CCP’s Ministry of Finance on July 22 showed that in the first half of the year, the general public budget revenue of the CCP government was 11.5913 trillion yuan (about 1.6 trillion US dollars), down by 2.8%. VAT was down by 5.6%, corporate income tax dropped by 5.5%, personal income tax decreased by 5.7%; tariffs decreased by 5.2%, and the securities trading stamp duty was halved, decreasing by 54%, major sources of tax revenue were all declining.
Taiwanese economic expert Huang Shicong told the Epoch Times, “Currently, many public servants in (China) cannot receive salaries or pensions. Solving the local debt problem appears to be quite tricky.” He said that with the economy declining, both central and local finances are not in good shape. The CCP is clearly in a tough situation, wanting to increase expenditures but lacking funds, resorting to lowering deposit reserve ratios or interest rates to stimulate consumption. However, consumption remains stagnant, so the central government is authorizing local governments to increase taxes to address the challenging financial dilemma. In such a scenario, it is natural for outsiders to worry about local governments finding loopholes to squeeze the people.
The related “Decision” also mentions promoting the relocation of consumption tax collection points and gradually lowering these taxes at the local level. The scope of consumption tax collection includes 14 items such as tobacco, alcohol and spirits, cosmetics, valuable jewelry, and precious gems.
“The plan to gradually reduce local consumption taxes is a huge scam in itself, merely providing local governments with an ’empty cup,'” said Du Wen. “The tobacco tax is the major chunk of consumption tax. I once heard from a tobacco company executive that tobacco tax revenues have always been the main source of CCP military funding, while other consumption tax items are returned to localities in a way of disguised transfers.”
Du Wen points out that the mention of “gradually lowering taxes at the local level” in the “Decision” within the CCP’s context means that the policy has been finalized but will not be implemented immediately. When central funds are sufficient, the money will be slowly allocated to local authorities. However, this amount would be a mere drop in the ocean for financially strapped local governments.
The “Decision” also mentions appropriately strengthening central authority, increasing the proportion of central fiscal expenditures, and reducing central fiscal authority entrusted to local governments.
Du Wen stated that in the fiscal reform emphasizing central authority is a way of enhancing power for the central government, implying a return to planned economy. Planned economy is essential for enforcing central directives, something a market economy cannot guarantee.
“With such an absurd governing strategy, this regime will have a hard time surviving,” he concluded.