The "Local Surtax Law" is coming, what does it mean?

The Ministry of Finance disclosed the 2025 Annual Report on the Construction of a Law-Based Government.
When discussing the work plan for 2026, the report for the first time proposed to improve the formulation and revision of laws and regulations such as the Local Surtax Law.
This is also the first time the official has proposed to formulate a Local Surtax Law.

The establishment of the local surtax is essentially a legal integration of the current “one tax, two fees” system, and also a decentralization of “tax authority.”

According to top-level design, the reform plans to merge the urban maintenance and construction tax, education surcharge, and local education surcharge into a unified “local surtax,” and authorize provincial governments to independently determine applicable tax rates within a certain range.

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To understand the uniqueness of the “local surtax,” one must trace back to the special meaning of the word “surtax” in China’s fiscal and tax system.

For a long time, China’s local finance has been highly dependent on a fee and tax system that “parasitizes” on turnover taxes.

In the current “one tax, two fees” system, the urban maintenance and construction tax (abbreviated as urban construction tax) is a statutory tax, while education surcharge and local education surcharge are administrative and institutional charges, falling under non-tax revenue.

This “parallel fee and tax” pattern has brought many governance issues: the mandatory and normative nature of charges is inherently weaker than taxes, and there are often ambiguous areas in local budget management.

Converting “two fees” into “taxes” is a key step for China to achieve the principle of “taxation by law.”

As of early 2026, 14 out of China’s 18 existing tax categories have been legislated.

The formulation of the Local Surtax Law means that the originally temporary and compensatory “education fee” will be incorporated into the strict framework of national law.

This has long-term significance for improving tax transparency and reducing compliance costs for enterprises.
Enterprises will no longer face administrative “payment notices” but will fulfill their obligations based on laws passed by the National People’s Congress.

Let’s also talk about the decentralization of tax authority.

A feature of this reform is that “authorization is given to local governments to determine specific applicable tax rates within a certain range.”

Under China’s unitary administrative management system, tax authority has long been highly centralized.

The formulation of the local surtax law essentially grants local governments a certain “tax pricing power” by the central government.

The business logic behind this decentralization is: the costs of public goods vary across regions.

A first-tier city with a dense subway network and a small town mainly engaged in agriculture will certainly face different financial pressures for urban maintenance and education investment.

Granting local governments the right to choose tax rates allows them to adjust their financial capacity based on their expenditure responsibilities, creating a cycle where “financial resources match responsibilities.”

Another visibly beneficial aspect is that the establishment of the local surtax provides local governments with an endogenous financial source that no longer relies on “land finance,” helping to alleviate local debt risks and support a more stable macro-credit environment.

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The estimated scale of the local surtax is about one trillion yuan.

The local surtax is not baseless; its tax base is directly anchored on China’s two most important turnover taxes—value-added tax and consumption tax.

According to data disclosed by the Ministry of Finance for 2025, the potential scale of the integrated local surtax approaches 1 trillion RMB.

Of course, the actual scale of the local surtax may further expand with China’s ongoing “consumption tax reform.”

The 2026 government work report explicitly proposed to adjust the consumption tax collection process, shifting some high-energy-consuming, high-pollution, or luxury goods from production-side to retail-side, and moving the tax base from the place of production to the place of consumption.

Since the local surtax is based on the consumption tax, this “shift” reform will produce significant cumulative effects:

On one hand, it expands the tax base.

Retail prices usually include more markup, and expanding the tax base directly drives the growth of the surtax.

On the other hand, it shifts incentives.

Previously, local governments were keen on attracting large factories (taxation at the place of origin), but in the future, they will be more motivated to improve the business environment and promote local consumption, because only when local residents “buy and buy” will surtax flow into local coffers.

This aligns very well with our policy direction of “promoting consumption and stimulating domestic demand,” and is crucial for building a fair and unified national market, eliminating opaque regional subsidies, and improving total factor productivity.

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For ordinary people, we must realize that all fiscal and tax terms ultimately reach ordinary residents through “prices” and “services.”

Although the local surtax is levied on enterprises, its tax basis (value-added tax/consumption tax) is a typical excise tax outside the price.

With the normalization of the local surtax, costs in livelihood sectors such as catering, daily necessities, and express logistics may see slight increases.

For the general public, this impact is subtle—it may manifest as a five-cent increase in delivery fees or a slight price adjustment for a bottle of drink.

This increased sensitivity to consumption tax burdens, amid residents’ strengthened savings willingness and still-recovering purchasing power, requires policymakers to be extremely cautious in setting tax rate windows, especially in the context of “tax authority decentralization to local levels.”

Of course, I believe that the decentralization of tax authority will always be limited, with the central government providing unified policy guidance to prevent negative effects.

In summary, the transition from “fees” to “taxes” signifies that policymakers are attempting to shift from resource mobilization to rule-based governance, from investment-driven to consumption-driven, and from land-driven to rule-driven development.

Although there are transitional challenges such as regional fairness and enterprise cost pressures, in the long run, a local tax system with appropriate autonomy, transparency, and statutory basis aligns with the direction of tax reform and is conducive to sustainable fiscal support.