Reform Consumption Tax, Improve Local Tax System

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Improving the local tax system is an important part of fiscal and tax system reform. The “14th Five-Year Plan” proposes to improve the local tax system, promote the shift of consumption tax collection to later stages and steadily devolve it to local governments, and increase local autonomous financial resources.

Experts believe that to improve the local tax system, the reform should take the consumption tax reform as a breakthrough, with the main goal of enhancing the sustainability of local finances, and gradually cultivate stable tax sources. At the same time, focus should be on developing key local industries, nurturing high-quality tax sources, establishing cross-regional coordination mechanisms, and optimizing collection mechanisms.

Enhancing Local Autonomous Financial Resources

“The goal of improving the local tax system is to strengthen local financial independence, reduce reliance on transfer payments and special local government bonds, and promote a transition toward an autonomous and sustainable local tax system, laying a solid financial foundation for high-quality development,” said Liu Rong, professor at the School of Finance and Taxation at Southwestern University of Finance and Economics, to China Securities Journal.

“Shared taxes between the central and local governments usually have broad tax bases, large scale, and strong stability, while exclusive local taxes generally have narrow tax bases, smaller volume, and more dispersed sources. Local tax revenue is highly dependent on shared taxes, and there is limited room for overall planning of local autonomous finances,” said Yuan Haixia, director of the China Credit International Research Institute, in an interview.

Yuan Haixia suggested that the current focus should be on consumption tax reform as a starting point, gradually improve the local tax system, and increase local financial independence. Meanwhile, accelerate reform of fiscal systems below the provincial level and expand local tax sources. In the long term, explore cultivating local main tax types, adhering to principles of stable tax bases, convenient administration, and strong regional attributes, to promote the formation of a robust system of local exclusive taxes.

Adjusting and Optimizing Tax Scope and Rates

Several experts believe that improving the local tax system should take consumption tax reform as a breakthrough to cultivate stable tax sources.

Consumption tax is China’s third-largest tax, after VAT and corporate income tax, levied on 15 categories of consumer goods such as tobacco, alcohol, automobiles, and refined oil.

The policy direction for consumption tax reform is already clear. The “14th Five-Year Plan” requires advancing the shift of consumption tax collection to later stages and steadily devolving it to local governments to increase local financial independence. This year’s government work report proposed adjusting and optimizing the scope and rates of consumption tax, and pushing some items’ collection links to later stages.

“This year’s government work report emphasizes the integrated optimization of tax scope, rates, and collection links for consumption tax, marking a focus on better leveraging the fundamental functions of the tax system, balancing tax regulation, collection efficiency, and the fiscal pattern between central and local governments,” Liu Rong said. Given the large scale of consumption tax revenue, shifting collection links to later stages and devolving it to local governments will significantly supplement local sources. Consumption tax is expected to become one of the main taxes in the local tax system.

Regarding key categories for consumption tax reform, experts suggest prioritizing high-pollution, high-energy-consuming industries, and high-end luxury consumption.

Liu Rong recommended that adjusting the scope and rates of consumption tax could focus first on categories like tobacco, alcohol, precious jewelry, and luxury cars. Specifically, under stable tax burdens for general consumer goods, adjust the rates and collection links for high-energy-consuming and high-consumption categories. This would help guide green and rational consumption, support people’s livelihoods, reduce tax burdens on enterprises, and encourage industry green transformation.

Ruo Zhi Heng, chief economist at Yuekai Securities, also believes that the scope of consumption tax could be expanded to include high-pollution and high-energy-consuming industries, and consider including high-end service sectors.

“Shifting the collection of consumption tax from production to consumption will also guide local governments to focus more on cultivating consumption tax sources, improving consumption infrastructure, and enhancing residents’ consumption capacity, thereby promoting a fiscal and tax governance pattern compatible with a unified national market and fostering regional coordinated development,” Yuan Haixia said.

Establishing Cross-Regional Coordination Mechanisms

China’s tax system reform continues to deepen, and improving the local tax system is already underway.

The 2025 China Fiscal Policy Implementation Report shows that various fiscal departments are promoting the issuance of implementing regulations for the VAT Law, building a supporting, systematic VAT framework. Adjustments are being made to policies on ultra-luxury car consumption tax, and efforts are underway to include all volatile organic compounds in environmental protection tax collection. The water resource fee-to-tax pilot program is being fully promoted, with water resource tax revenue during the pilot period fully allocated to local governments.

Experts believe that local governments should focus on industry cultivation and development to nurture high-quality tax sources; simultaneously, promote digitalized tax collection, establish cross-regional coordination mechanisms, and optimize collection processes.

“Currently, there is a lack of strong coordination in cross-regional tax collection and management,” Yuan Haixia said. She suggested gradually unifying tax collection standards across regions for each tax type, advancing digital tax administration, and establishing cross-regional cooperation mechanisms to reduce collection costs and ensure tax fairness.