China to Levy Environmental Tax – Don’t Cheer Yet

Environmental tax is not a niche idea - China has been contemplating an environmental tax regime for some years now, see previous coverage: 2007, 2008, 2009. And after our "grizzled" China-watcher has waited for an entire year, Beijing announced its plan to reform the taxation system, of which the introduction of an environmental tax could be an important component.

To shed light on the possible new tax regime, People's Daily interviewed Su Ming, associate director of the Research Institute for Fiscal Science of the Chinese Ministry of Finance, and you can read the English translation by my friend Graham Webster here.

In China's existing taxation system of 19 items, five major ones are environmentally related: resource tax, consumer tax, motor vehicle tax, value-added tax and corporate income tax. A comprehensive environmental tax regime could include the "greening" of the existing taxes, and the creation of a separate environmental tax.

Take the consumer tax for instance. Established in 1994, it now has 14 items, 8 of which are related to environment, and they are: fireworks, motorcycles, cars, cigarettes and alcohol, wood-made disposable chopsticks, refined oil products, and hardwood flooring. Note that the taxation on disposable chopsticks and hardwood flooring are added in 2006, signaling a progress in China's environmental-consciousness in taxation.

Similarly, the other existing taxes could be adjusted for the benefit of environmental protection. The current environmental tax under discussion would primarily be a new separate tax including carbon tax, and hopefully, tax on sulfur dioxide, nitrogen oxide, and industrial water pollutants - four biggest environmental enemies in China today. The next step could be solid waste, garbage tax, noise tax, etc.

However the tax is defined at last, we should pay particularly attention to two things:

1. Measurement of the pollutants or environmental impact, which would be the basis for the tax, requires not only competent agents of action, be it local environmental bureau or other agencies, but also strong and vibrant citizen participation. As seen from the utilization of the current Environmental Impact Assessment Law, local environmental bureaus are extremely weak (as opposed to the local enterprises), with the exception of Beijing Environmental Bureau, and so far voluntary citizen groups have been the primary agents in provoking this law to protect their living environment. To make the environmental tax system work, China has to give environmental NGOs and private citizens more space to act as a check on the industries.

2. Revenue-neutral. In the interview Graham translated, Su Peng said the taxation would receive support among local governments because of their revenue increase. Yet it is crucial that the taxation does not increase the already immense inequality. We can all name a dozen reasons why a proposed environmental tax would affect the poor much more than the rich. But in China, because of the type of jobs those heavy industries or coal fire plants offer, it is very likely that those factories and power plants would just shift the extra tax burden onto their uneducated, short-contracted (many even without a contract) workers. So this calls for more rigorous enforcement of Labor Law and Labor Contract Law in addition to a social welfare net to ensure that the cost does not shift to the poor. Many proposals of balancing the environmental tax revenue suggest using the revenue in environmental restoration or reallocating neighborhoods around the heavy-industry factories. Either way, this should be of main concern to the policy makers.