1. China’s new-energy vehicle (NEV) adoption has drastically outpaced official targets, reaching the 2035 goal a decade early. [para. 1] Beijing originally aimed for 20% of new-vehicle sales by 2025 and mainstream adoption by 2035, but NEVs already accounted for 47.9% of sales in 2025 and have since surpassed 50% in both domestic and passenger-car markets. [para. 2]
2. The auto tax system, designed for internal combustion engines, has been unable to adapt. [para. 1] Key levies—consumption tax, vehicle and vessel tax, and purchase tax—are tied to engine displacement, meaning pure electric vehicles pay little to nothing while plug-in hybrids pay reduced amounts. [para. 3] This creates a growing revenue squeeze as NEV sales climb.
3. The most acute problem is road-maintenance funding. [para. 4] Non-toll roads are financed through consumption taxes on refined oil (1.52 yuan per liter of gasoline, 1.2 yuan per liter of diesel), but NEV drivers contribute almost nothing despite heavier vehicles adding to road wear. [para. 4] In May 2026, fossil-fuel-powered car sales fell 37.5% year-on-year to 650,000, just 43.1% of new-vehicle sales, while NEV passenger-car penetration hit a record 62.9%. [para. 5] The decline makes the traditional road-funding model unsustainable, a person close to policymakers noted. [para. 6]
4. The system is also strained by the central-local government tax split. [para. 7] Among auto taxes, only the small vehicle and vessel tax is local; value-added tax is shared, but purchase and consumption taxes flow almost entirely to the central government. [para. 11] This encourages local governments to compete improperly for auto investment, worsening overcapacity, while they have little incentive to stimulate car sales. [para. 12] Industry executives like Li Shufu and Zhu Huarong have proposed sharing purchase and consumption tax revenue to align local incentives with consumption rather than production. [para. 13][para. 14]
5. Engine displacement is becoming an outdated tax base. [para. 15] As NEVs become larger and heavier—average weight rose 20.2% from 2020 to 2025, from 1,521 kg to 1,828 kg [para. 10]—they impose more road wear while contributing less revenue. The displacement-based system also fails to reflect carbon footprints or road usage, and NEVs are not truly zero-emission when production and recycling are considered. [para. 15]
6. Policymakers and experts have floated various reform options. [para. 16] Short-term ideas include raising the refined-oil consumption tax (though that could hurt already declining gasoline car sales) [para. 17], taxing electricity used by NEVs starting with public charging [para. 18], or using the consumption tax reform process to create a separate NEV tax category at a low rate like 1% or 3%. [para. 21] Another suggestion is taxing lithium batteries. [para. 22] Longer-term, a shift to mileage-based road charges or a carbon-emission-based tax base has been proposed. [para. 23][para. 24]
7. Any overhaul is complicated by the need to balance multiple interests and the fact that auto taxes are a major revenue source—China collected about 1.9 trillion yuan in auto-related taxes in 2023, equal to 10.5% of total national tax revenue. [para. 26] The government has already begun phasing out NEV purchase-tax exemptions, moving to half exemption from Jan. 1, 2025, and full 10% rate from Jan. 1, 2028. [para. 27] However, the Middle East conflict reversed a temporary gasoline-car rebound, with NEV passenger cars reaching 51.5% in March 2026 and 61.4% in April. [para. 28] The person close to policymakers suggested combining short-term measures with long-term reform, starting with NEVs as transitional revenue sources. [para. 30] Overall, consensus is that reform will be a long process given the wide range of interests and the evolving auto industry. [para. 31]
AI generated, for reference only
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