context: Rebuilding local revenue incentives has been a long-running fiscal reform problem, sharpened after the 2016 VAT reform weakened local own-source taxation and the property downturn eroded land revenue. Beijing is now trying to give local governments more stable statutory tax sources and limited tax discretion while curbing reliance on tax rebates, subsidies and registration-based competition for mobile tax bases. Local surtax is one step towards changing how local governments raise revenue, rather than simply giving them more of it.
The Ministry of Finance and State Taxation Administration released the draft Local Surtax Law for comment through 27 Sep 2026, merging urban maintenance and construction tax, education surcharge and local education surcharge into a single local tax with province-level rate-setting power.
The reform largely carries over the existing tax base and aggregate burden, but changes the institutional incentives around some C¥913.4 bn collected through the three items in 2025
- sets a nationally defined 11–13 percent rate band, replacing current location-based combined rates
- lets province-level governments propose the applicable rate, subject to provincial legislature approval and central filing
- requires rate-setting to consider local economic conditions and development of the national unified market
- turns three fragmented revenue items into a statutory local tax, expected to become the largest tax assigned wholly to local governments
The rate band makes the trade-off in local revenue policy more explicit. Provinces under greater fiscal strain can opt for a higher rate, while those putting more weight on business activity can keep it lower, argues Tian Zhiwei 田志伟 Shanghai University of Finance and Economics Institute of Public Policy and Governance dean. Greater tax autonomy should let local governments respond to different fiscal conditions, Tian adds, without allowing rate rises to substitute for transfer, spending and debt reform.
This fits Tian’s broader prescription for local tax reform. More stable and less mobile local tax bases can reduce dependence on land finance, curb competition for tax sources and strengthen the link between taxation and local public services. Local surtax only partly fits that model because its base still follows VAT and consumption tax, but formal province-level rate-setting moves local revenue policy in that direction.
The shift also sits alongside wider efforts to change how localities compete for revenue. Consumption tax reform is intended to give local governments a greater stake in consumer activity, while Beijing is restricting tax-linked investment subsidies and ‘invoice economy’ practices used to pull tax bases across jurisdictions. Taken together, these reforms are starting to reward cultivation of durable local tax bases while narrowing the space for manufactured or poached revenue.