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China’s Tax Revenue Declines as Its Leaders Brace for Trump’s Tariffs

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China’s Tax Revenue Declines as Its Leaders Brace for Trump’s Tariffs

Buried in China’s latest government budget were some numbers that add up to an alarming trend. Tax revenue is dropping.

The decline means that China’s national government has less money to address the country’s serious economic challenges, including a housing market crash and the near bankruptcy of hundreds of local governments.

Weak tax revenue also puts China’s leaders in a box as they square off with President Trump, who has imposed 20 percent tariffs on goods from China and threatened more to come. Beijing has less spare cash to help the export industries that are driving economic growth but could be hurt by tariffs.

The drop in tax collections leaves China’s leaders in an unfamiliar position. Until the last several years, China enjoyed robust revenue, which it used to invest in infrastructure, a rapid military buildup and extensive industrial subsidies. Even as economic growth has slowed gradually over the past 12 years, taking a dent out of consumer spending, tax revenue held fairly steady until recently.

Tax revenue fell further last year than ever before. And the only two previous declines in recent decades were under special circumstances: In 2020, China imposed an essentially nationwide pandemic lockdown for a couple of months, and in 2022, Shanghai endured a two-month lockdown.

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China’s declining tax revenue now has several causes. A big one is deflation — a broad decline in prices. Companies and now the Chinese government find themselves with less money to make monthly payments on their debts.

Since September, Chinese officials have promised several times that they were on the cusp of doing what practically every foreign and Chinese economist recommends: spending more money to help the country’s beleaguered consumers with such measures as higher pensions, better medical benefits, more unemployment insurance or restaurant vouchers. But again and again, including on Sunday, they have laid out ambitious programs without providing more than a smidgen of extra spending.

The usual explanation for the frugality lies in longstanding opposition from Xi Jinping, China’s top leader, who warned in a speech in 2021 that China “must not aim too high or go overboard with social security, and steer clear of the idleness-breeding trap of welfarism.”

But China’s 2025 budget, which the Ministry of Finance released on March 5, suggests a different explanation: The national government may not have the money. Despite record borrowing, it would be hard-pressed to find the money needed to stimulate consumption.

Overall tax revenue fell 3.4 percent last year. That might not look like a lot. But it is a sizable divergence from the overall economy, which according to official statistics grew 5 percent before being adjusted for deflation.

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Falling tax revenue means that China’s budget deficits are widening not because of extra government spending to help the economy, but because there is less money coming into the till. The problem has been worsening for years at local governments, which have plummeting revenues from selling state land, and has spread to the national government.

Fitch Ratings calculates that overall revenue for the national and local governments — including taxes and land sales — totaled 29 percent of the economy’s output as recently as 2018. But this year’s budget indicates that overall revenue will be just 21.1 percent of the economy in 2025.

Roughly half of the decline comes from plummeting revenue from land sales, a well-documented problem related to the housing-market crash, but the rest comes from weakness in tax revenue, a new problem.

That adds up to a huge sum of money. If overall revenue had kept up with the economy over the past seven years, the Chinese government would have another $1.5 trillion to spend in 2025.

China announced this month that it would allow its official target for the budget deficit to increase to 4 percent this year, after trying to keep it near 3 percent ever since the global financial crisis in 2009. But analysts say the true deficit is already much larger, because China is quietly counting a lot of long-term borrowing as though it were tax revenue.

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Comparing spending only with actual revenue, without the borrowing, the Finance Ministry’s budget shows a deficit equal to almost 9 percent of the economy. In 2018, it was only 3.2 percent.

“Deficits are quite high and debt is rising quite quickly, so they are fiscally challenged,” said Jeremy Zook, a director of Asia and Pacific sovereign ratings at Fitch.

The biggest taxes in China are value-added taxes, a kind of sales tax that the government collects on practically every transaction, from rent to refrigerators. Last year, revenue from value-added taxes fell short of expectations by 7.9 percent.

The word “deflation” is prohibited in official Chinese documents, so the ministry came up with a euphemistic explanation: “This decrease was mainly due to the fact that the producer prices were lower than expected.”

Producer prices, essentially wholesale prices calculated as goods leave factories and farms, fell 2.3 percent in China last year.

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Revenue from value-added taxes began weakening in 2018. That was when the government cut these taxes sharply for exporters to help them offset the impact of tariffs imposed by President Trump in his first term.

The cost of that tax break has soared since then as China’s exports have surged, producing a trade surplus of almost $1 trillion last year even as the rest of the economy stagnated.

Another problem lies in falling salaries and rising layoffs, especially during the second half of last year. Income taxes collected from individuals were 7.5 percent below expectations last year, the Finance Ministry said in its budget.

China’s own steep tariffs on imports are another large source of revenue. But having lost much of their savings in the housing market crash, China’s consumers have cut back on purchases of imports like handbags and perfume, while prices have fallen for many imported goods. So revenue from customs duties was 9.2 percent below forecasts last year, the Finance Ministry said.

This year’s financial picture could be even worse than the budget anticipates. The Finance Ministry’s budget repeated many of the same optimistic assumptions about tax revenue and overall economic performance that it made last year.

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Governments in the West derive considerable revenue from taxes on investment gains, inheritances and real estate. But China has no taxes on investment gains or inheritances and almost none on real estate.

The general lack of real estate taxes lies at the root of a separate problem: China’s local governments are also running out of money. Until recently, they derived up to 80 percent of their revenues from selling land to property developers.

But those sales have plummeted since the housing crash began in 2021, which has gutted demand for new apartments and bankrupted many developers.

Local governments are responsible for most pensions, medical benefits and other social spending in China. The national government has been selling extra bonds to raise money for bailing out the weakest local governments, many of which are behind on their debts. The national government has called for local governments to step up social spending but, short on cash itself, has offered scant new financial assistance.

And new taxes are not likely forthcoming, according to Jia Kang, a retired research director at the Finance Ministry and still one of China’s most influential voices on tax policy. He said in an interview that public opposition to inheritance taxes is strong, while taxes on investment gains or real estate would hurt stocks or the housing market.

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One factor not causing China’s tax challenges is fraud or tax evasion, Mr. Jia said. The procedures for checking on payments have become very detailed, he said. “It is difficult to cheat in this system.”

Siyi Zhao contributed research.

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Amazon MGM Studios’ ‘Project Hail Mary’ rockets to the top of the box office

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Amazon MGM Studios’ ‘Project Hail Mary’ rockets to the top of the box office

The Ryan Gosling-led “Project Hail Mary” rocketed to the top of the box office this weekend, marking a big win for Amazon MGM Studios.

The film — which stars Gosling as a science teacher who embarks on a space mission to save humanity — hauled in $80.5 million in the U.S. and Canada, making it the biggest domestic debut of the year so far. Globally, “Project Hail Mary” brought in $140.9 million.

The movie is an adaptation of a novel by Andy Weir, author of “The Martian” — another successful book-to-screen adventure. The big opening weekend for “Project Hail Mary” is a boost for Amazon MGM Studios, which had heavily promoted the film as an example of the big blockbusters it could produce.

“We believe deeply in the Hail Mary, and it’s clear audiences do as well,” Kevin Wilson, head of domestic theatrical distribution for Amazon MGM Studios, said in a statement. “What we’re seeing in theaters —the energy, the exit scores, the word of mouth — is everything we believed this film would deliver.”

Walt Disney Co. and Pixar’s “Hoppers” came in second at the box office this weekend with a domestic total of $18 million. The original animated film has now garnered $120.4 million in the U.S. and Canada since it debuted in theaters earlier this month.

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Indian action film “Dhurandhar The Revenge” came in third with $10 million, followed by Disney-owned Searchlight Pictures’ horror film “Ready or Not 2: Here I Come” and Universal Pictures’ romance “Reminders of Him” rounding out the top five.

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Testing for toxins in smoke-damaged homes could be mandatory. What to know

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Testing for toxins in smoke-damaged homes could be mandatory. What to know

When the January 2025 firestorms swept through Altadena and Pacific Palisades they not only burned down homes but left thousands still standing riddled with smoke damage.

The disaster set the stage for lawsuits by fire victims who alleged their homes were filled with toxic contaminants, yet insurers refused to do hygienic testing and properly clean and make them habitable again.

This week, a much-anticipated bill was unveiled in the Legislature that would establish first-in-the-nation limits for smoke-damage contaminants, require testing and force insurers to restore homes to their prior condition.

The proposed law specifically applies to homes damaged in urban or “wildland-urban interface” fires — such as those in January 2025 — where burning structures, cars, utilities and other items generate more toxins than a rural wildfire.

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Authored by Assemblymember Mike Gipson (D-Carson) and sponsored by Insurance Commissioner Ricardo Lara, Assembly Bill 1795 follows similar legislation introduced by Assemblymember John Harabedian (D-Pasadena).

That bill would apply to homes, schools and workplaces — and their properties — requiring insurers to meet existing health standards for lead and asbestos cleanup, while having the state develop additional ones for other contaminants.

Lara’s bill also follows a report issued last week by a smoke-damage task force he established last year, which established the framework for the bill. However, consumer advocates said it was stacked with members tied to the insurance industry.

Lara, who has been asked to step down by critics over his handling of insurers’ claims practices, has defended the task force and his handling of the wildfires, noting his department is investigating insurers.

Here’s what to know about the legislation, which still must go through legislative hearings before an Assembly vote.

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Why is this bill a big deal?

Under the current system, insurers are not required to pay for expensive hygienic testing for toxins in smoke-damaged homes. That has been a big source of friction with fire victims, fueling the ongoing litigation over the matter.

Under the bill, however, insurers would be required to cover testing for lead, asbestos and other contaminants that have been found in soot, char and ash inside homes after a wildfire. Such testing would be required both before and after any cleanup work has begun to ensure the home is left in “preloss” condition. Additionally, it sets timelines for claims payments and prohibits insurers from halting payments for temporary housing until a home is cleared as safe, if a state of emergency has been declared.

Who will determine what levels of various contaminants are safe?

The bill requires the California Environmental Protection Agency to develop minimum sampling, testing and chemical screening levels by June 30, 2027. The requirements would be most rigorous in a “high-impact” zone within six miles of a fire perimeter, with potentially lesser requirements for residences as they get further away. The zones and testing requirements could be adjusted for specific fires.

The agency also is required to establish training standards and certification requirements for inspectors and others involved in the testing and restoration of properties.

How does this help the January 2025 fire victims?

More than 40,000 insurance claims have been filed as a result of the Eaton and Palisades fires, with more than 13,000 for smoke damage.

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The bill allows the EPA, state and local agencies to establish expedited “interim” standards. Insurance department spokesman Michael Soller said this provision was written with the January 2025 fires in mind.

What do consumer advocates say?

They generally support the proposed changes. Amy Bach, executive director for United Policyholders in San Francisco, who sat on the smoke task force and was critical of its makeup, said she was pleased that the bill “acknowledges the perspectives of the homeowners and will advance their interests in an important way.” But she expects insurers will complain it’s too costly and threaten to leave the state if the bill is not toned down.

Attorney Dylan Schaffer, who has sued the California Fair Plan, the state’s insurer of last resort, over its smoke-damage practices, said the bill was a “very strong nod in the right direction” though it will be the final standards established by the state for testing and cleanup that will be most important. “It always gets down to the details,” he said.

What is the industry’s reaction?

The insurance industry is expected to lobby for changes to the bill, suggesting it could impose burdensome costs on companies.

Karen Collins, a vice president of the American Property Casualty Insurance Assn., said that “insurers support science‑based approaches to evaluating smoke damage and guiding appropriate remediation” but want to “help ensure the bill strikes a reasonable balance — protecting consumers while preserving insurance affordability, availability, and market stability.”

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Rex Frazier, president of the Personal Insurance Federation of California, an industry group representing state property and casualty insurers, also said the bill lacks analysis of the “tradeoffs” between the higher claims payments that will result from it and and its effect on consumer premiums.

He also was concerned that the bill appears to bypass traditional rule-making procedures and allow the state EPA to establish the toxic contaminant and other standards without public hearings.

Soller said the intent of the bill is to allow the agency to forgo hearings only in developing interim standards.

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San Diego County agency selling water to keep its high rates in check

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San Diego County agency selling water to keep its high rates in check

San Diego County’s water agency is selling some of its water to another Southern California agency to help limit increasingly high water costs for 3.3 million people.

The water is going to Western Municipal Water District, which serves a growing area of nearly 1 million people in Riverside County, including Corona, Riverside and Temecula.

The San Diego County Water Authority will transfer at least 10,000 acre-feet of water per year over the next 21 years, enough for about 30,000 typical households.

The agencies said the deal will be worth about $100 million over the first five years.

The San Diego County agency has invested heavily to get more water in recent decades. In 2003, it struck an agriculture-to-urban transfer deal and it also buys water from the Carlsbad desalination plant under a 30-year agreement. These actions have brought San Diego County plentiful water — also some of the most expensive in the state. At the same time, conservation efforts in San Diego County have reduced water needs.

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The San Diego County Water Authority delivers water to 22 cities and other agencies. Last year its board approved raising wholesale water rates 8.3%, which drew criticism from residents who said they were already struggling to afford their water bills.

Board Chair Nick Serrano said the deal “allows us to maximize the value of the investments San Diego County residents made over decades, strengthen water reliability, and do so in a way that is mindful of affordability.”

The two agencies said in a joint statement on Thursday that for Western Municipal, the additional water will help during drought and ensure reliable water without the cost and time involved in developing new water infrastructure projects.

The water will move from one area to the other through the pipelines of the Metropolitan Water District of Southern California, the regional wholesaler that imports water from the Colorado River and Northern California. Both San Diego County and Western Municipal are members of the MWD.

An agreement between the MWD and the San Diego County Water Authority last year ended a 15-year legal battle over water costs and cleared the way for San Diego County to start selling some of its excess water to areas that need it.

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