After the Third Plenum of the Chinese Communist Party (CCP), mainland Chinese media reported that the CCP Central Committee is considering consolidating the Urban Maintenance and Construction Tax, Education Surcharge, and Local Education Surcharge into a new local tax category called the Local Surcharge Tax, with a theoretical revenue scale of nearly one trillion RMB. This news has sparked controversy online in mainland China. Several overseas experts interviewed by Epoch Times expressed that if the CCP imposes the Local Surcharge Tax, it is akin to “killing the goose that lays the golden eggs” and seeking desperate measures.
In the middle of this month’s CCP Third Plenum, the adopted “Decision” document mentioned the need to “increase local autonomous financial power, expand local tax sources, and appropriately expand local tax management rights” to address the financial difficulties faced by local governments, especially at the grassroots level. On July 23, the mainland media “First Financial” reported that the authorities have put forward a new measure to merge the Urban Maintenance and Construction Tax, Education Surcharge, and Local Education Surcharge into a Local Surcharge Tax, granting local authorities the power to determine specific applicable tax rates within a certain range.
Mainland China has been levying the “Urban Maintenance and Construction Tax” since 1985, with taxpayers being units and individuals paying value-added tax and consumption tax. The tax calculation is based on multiplying the actual value-added and consumption tax paid by the taxpayer by the corresponding urban construction tax rate (7%, 5%, 1%), which is the amount required to be paid for the urban construction tax.
The Urban Construction Tax falls under the category of local taxes, with revenue going to local governments. According to data from the CCP’s Ministry of Finance, the Urban Maintenance and Construction Tax brought in 523.3 billion RMB in revenue in 2023, accounting for approximately 4.5% of local general public budget revenue at the same level.
Additionally, at the national level, the CCP has been levying the “Education Surcharge” since 1986, and later authorized local governments to levy the Local Education Surcharge, which was fully implemented nationwide in 2010. Both the Education Surcharge and Local Education Surcharge are administrative fees and contribute to local revenue. The taxpayers for both are units and individuals paying actual value-added and consumption taxes, with tax calculation based on multiplying the actual value-added and consumption tax amounts by the corresponding tax rates – 3% for the Education Surcharge and 2% for the Local Education Surcharge.
Data released by the CCP’s Ministry of Finance indicates that in 2023, total revenue from value-added and consumption taxes amounted to approximately 8.545 trillion RMB. Based on the estimated total revenue of approximately 427.3 billion RMB applying a 5% tax rate from the Education Surcharge and Local Education Surcharge, in addition to the 523.3 billion RMB raised from the Urban Construction Tax in 2023, a rough estimate of the combined revenue from these three taxes yields around 949.6 billion RMB.
Professor Xie Tian from the Darla Moore School of Business at the University of South Carolina stated to Epoch Times that while allowing local governments to increase taxation may help alleviate their financial difficulties, the approach is extremely detrimental and burdensome to the Chinese people.
“The last tax reform of the CCP transferred the rights and benefits of many taxes to the central government, resulting in less money for local governments. Later, they came up with a method to overcome this, which is through land sales, known as land finance. Local governments increase their tax revenue from developers and operators involved in selling houses. Land finance indeed helped alleviate financial woes for the CCP’s local governments, but the good times didn’t last. After the bursting of the real estate bubble today, land sales revenue sharply decreased, with no income from the real estate industry. The CCP won’t let local governments go bankrupt, but in reality, local governments have reached a point where they can’t even pay salaries and have to ask for money from the central government. The central government cannot produce the funds, so now they are letting local governments raise taxes on their own and decide how much to increase.”
Xie Tian mentioned that the land finance system may have temporarily relieved financial burdens for the CCP’s local governments but could place a heavy burden on the people in the long run. “A few taxes are all collected from the people. If they tax construction, it means everyone buying or building houses has to pay. With the education surcharge, all parents sending their children to school have to pay, even those without children attending school also need to pay. Everyone is subject to increased taxes, which is a very malevolent approach.”
Taiwanese economist Huang Shicong pointed out to Epoch Times that the CCP’s finances are facing significant challenges, with many regions falling into debt traps. To increase financial revenue, the central government is allowing local governments to raise taxes. However, the issue is robbing Peter to pay Paul; these tax revenues are drawn from the general public, merely a transfer of funds. “Levying these taxes is merely shifting wealth from the general public to local governments.”
He believes that this will lead to a decline in public purchasing power, which will in turn impact the stability of the financial system itself. While this may be a short-term measure, in the long run, it will certainly affect the overall economic development.
“Local governments need to first examine their own burdens. Currently, many regions are spending money on significant development projects and large-scale infrastructure. Is this really necessary?”
Huang suggested that the focus should be on improving repayment capabilities, aiming to avoid imposing taxes on the public. However, the dilemma lies in local governments’ excessive reliance on land finance, which hinders a quick transition, placing them in an awkward position.
“Before transitioning effectively, imposing these so-called education surcharges and construction surtaxes on the public is a short-term solution and cannot be sustained for long. At some point, if the public lacks the funds for you to levy, it becomes a situation of seeking desperate measures.”
Economist Li Hengqing, based in the United States, expressed to Epoch Times that since Xi Jinping took office, the central government has expanded its powers, trying to centralize all the money and distribute it back to localities through transfer payments. With local governments suffocating under mounting debts and the central government unwilling or unable to provide financial support, they are now allowing various regions to experiment with imposing taxes.
“The message to local authorities is, ‘Figure it out yourselves; try different tax sources and bases.’ The risks are huge; what if the attempts fail and people revolt?”
Li Hengqing believes that officials at the local level are likely adopting a passive attitude. If they fail, no one can bear the responsibility, thus the problem remains unresolved.
He pointed out that in a democratic country, solving the issue of local government debt requires using budgets to address government finances, balancing revenue and expenditure, determining tax rates based on what needs to be done and approved through legislation. “This is the fundamental operation of a democratic country. However, in present-day China, the imposition of taxes, and the extent of these taxes, has not gone through the approval of the people.”
Li Hengqing speculated that this could lead to arbitrary taxation, inevitably sparking social backlash. Just as in the case of urban management and agricultural management, which led to numerous forms of resistance. Many social destabilizing factors may eventually erupt.
“In the United States, changes in tax laws must pass through Congress; it must be proven to take effect. You cannot have a situation where government agencies can arbitrarily increase taxes. However, the change in nature – now shifted to local governments – has been passed down by the CCP central authority.”
Li Hengqing suggested that if the central government encourages local governments to experiment on their own, and it results in social upheaval, the central government will not come to their rescue. Hence, local government officials are cautious, fearing that failed attempts could strip them of their livelihoods. Therefore, the current proposal for tax hikes holds little significance.