MNI: China Likely To Ease Local Fiscal Pressure By Reforms
China eyes local-government tax reform.
China looks set to increase the share of taxes raised by local governments and reduce their responsibilities for spending, advisors told MNI, with some pointing to consumption tax as a focus of fiscal and tax reforms likely to be announced at the Communist Party’s Third Plenum this week.
Local governments’ reliance on land sales has been laid bare by the property slump of the past three years, with revenues sliding to CNY5.8 trillion last year from a 2021 peak of CNY8.7 trillion. Currently, local governments keep half of value-added tax revenue and 40% of personal income tax, while the central government retains 60% of corporate income tax and all of a consumption tax levied mainly on polluting or high-end consumer goods, which accounts for almost a tenth of total tax revenues, advisors noted.
“Local governments may be allowed to keep half of the consumption tax,” said Zhang Yiqun, director at a fiscal studies institute affiliated with Jilin province’s finance department. “The leadership gathering this week could set the tone, and a trial program could roll out as soon as this year after the legislative body fills in details.”
While the characteristics of consumption tax, originally imposed in order to regulate spending on luxury and polluting items, make it a less comfortable fit for local governments than would be the case with a potential property tax, authorities will steer away from the latter while the property market remains so weak, according to Zhang and other advisors.
While economic growth slowed more than expected to 4.7% y/y in Q2, value-added tax, corporate income tax, and personal income tax revenues all fell, sliding by 6.1%, 1.7%, and 6.0% y/y from January to May, while takings from consumption tax grew by as much as 7.2%, Ministry of Finance data showed. (See MNI EM: China Slowdown Likely To Prompt Extra Fiscal Stimulus)
FISCAL IMBALANCE
Policymakers are likely to adjust the point of charging consumption tax from the producer stage to wholesalers and retailers, as well as adjusting rates and expanding the list of taxable items in order to broaden the tax base in the longer term, said Zhang, noting that many luxury consumer goods such as private jets are not currently targeted.
While such a reform would mostly benefit more developed regions with larger populations and higher purchasing power, the central government could compensate by increasing transfer payments to less developed areas of the country, Zhang added.
China’s eastern, central, western and northeastern provinces would see tax revenue increase by CNY331 billion, CNY156 billion, CNY159 billion and CNY50 billion respectively if the collection point is adjusted for consumption tax on tobacco, alcohol, refined oil, and automobiles – categories which account for 98% of the levy’s revenues – and the monies raised split 50-50, according to calculations by China Galaxy Securities.
However changing the tax’s collection point to the wholesale and retail stages will pose significant practical challenges, said an advisor who did not want to be named. The advisor agreed with Zhang that a property tax would be better suited for local governments in the longer-run.
SPENDING RESPONSIBILITIES
The central government is also likely to take over some areas of local government spending, the advisor said. In 2023, local governments' fiscal revenues accounted for 54% of the nation's total, but their expenditures accounted for 86%, the finance ministry data shows.
Former Minister of Finance Lou Jiwei said in a recent public speech that social security and pension-related payments should be made by the central government, noting that its expenditures only totalled 12% of GDP, well below the over 50% seen in mature market economies and the average 61% within the OECD.