Chinese authorities are collecting decades-old tax arrears from companies and individuals as the government tries to plug massive budget deficits and tackle the growing debt crisis.

More than a dozen listed Chinese companies said they had been hit with millions of dollars in back taxes in a renewed attempt to repair the country’s finances. The crisis had caused a downturn in the real estate market and ruined the sale of land leases – one of the main sources of income.

The guidelines, issued after a recent planning meeting of senior Communist Party officials, called for an expansion of local tax revenues and said local governments should “enhance their tax administration capacity and improve their debt management.”

Local government debt is estimated to be as high as $11 trillion, including debt held by local financing institutions that is “off the balance sheet,” or not included in official estimates. Among the more than 300 reforms the party has unveiled are promises to better monitor and manage local debt, one of the biggest risks in China’s financial system.

This is easier said than done, and experts doubt how consistently the party will implement its promises to improve the tax system and make control of state revenues more balanced.

“They are not addressing existing local debt problems or fiscal capacity constraints,” said Logan Wright of independent research firm Rhodium Group. “The change in revenue distribution and spending responsibility at central and local levels is remarkable, but they have promised this before.”

The struggle to collect long overdue taxes shows how urgent the problems are.

Chinese food and beverage group VV Food & Beverage reported in June that it had received a tax bill for 85 million yuan ($12 million) for taxes dating back 30 years. Zangge Mining of western China said it had received two bills totaling 668 million RMB ($92 million) for taxes dating back 20 years.

Local governments have long been short of money because the central government controls most of the tax revenue and allocates only a limited amount to local governments, which in turn cover about 80 percent of expenses such as salaries, social services and investments in infrastructure such as roads and schools.

The pressure has increased as the economy slowed and costs rose due to the “zero COVID” policy during the pandemic.

Economists have long warned that the situation is unsustainable. They believe China must increase its tax revenues to balance its budget in the long term.

Under President Xi Jinping, the government has cut income, corporate and value-added taxes to win support, spur economic growth and encourage investment – often in ways that favored the rich, tax experts say. By most estimates, only about 5 percent of Chinese pay income taxes, far less than in many other countries. Government statistics show that income tax accounts for just under 9 percent of total tax revenue, and China does not have a comprehensive nationwide property tax.

Finance Minister Li Fo’an told state news agency Xinhua that the latest reforms would give local governments more resources and more power in tax collection and adjust the share of taxes they withhold.

“The central government does not bear much responsibility for spending and therefore does not feel the impact of tax cuts,” says Cui Wei, a professor of Chinese and international tax policy at the University of British Columbia.

The effectiveness of the reforms will depend on how they are implemented, Cui said. He is skeptical that the authorities will implement the proposal to increase central government spending. That “requires an increase in central government personnel, and that is an ‘organizational’ matter, not a simple spending issue,” he said.

“I wouldn’t hold my breath,” Cui said.

Sudden new tax laws have hit some companies hard, further damaging already fragile business confidence. Ningbo Bohui Chemical Technology in Zhejiang on China’s east coast halted most of its production after the local tax bureau demanded 500 million yuan ($69 million) in back payments on certain chemicals. To cope, the company is laying off employees and cutting salaries.

According to experts, the arbitrary way in which taxes are collected – with periods of leniency followed by sudden measures – is counterproductive and discourages companies from investing or hiring employees precisely when they need to.

“If entrepreneurs feel insecure, how can there be more private investment in China?” asks Chen Zhiwu, a finance professor at the University of Hong Kong Business School. “An economic slowdown is inevitable.”

The state tax agency has denied cracking down on tax laws nationwide, which may indicate that enforcement has been lax in the past. Tax authorities have “always been strict in preventing and investigating illegal tax and fee collection,” the agency said in a statement last month.

As local governments struggle to make ends meet, some of them are setting up joint operations centers run by local tax authorities and police to collect tax arrears. Such centers have been opened in at least 23 provinces since 2019, according to AP.

Both private individuals and companies are being targeted. Dozens of singers, actors and internet celebrities have been fined millions in recent years for tax evasion, according to a review of government notices.

Internet livestreaming celebrity Huang Wei, better known by her pseudonym Weiya, was fined 1.3 billion yuan ($210 million) for tax evasion in 2021. She apologized and avoided prosecution by paying the fine, but her social media accounts were blocked, crippling her business.

The hunt for revenue is not limited to taxes. In recent years, local authorities have been criticized for imposing large fines on drivers and street vendors, similar to how cities like Chicago and San Francisco make millions from parking tickets. Despite promises by top politicians to eliminate fines as a source of revenue, the practice continues. The city’s residents complain that Shanghai police use drones and traffic cameras to catch drivers talking on their cell phones at red lights.

Outside experts and Chinese government advisers agree that structural imbalances between local and central governments must be addressed. But under Xi, China’s most authoritarian leader in decades, decision-making has become more opaque. Businesses and analysts remain in the dark, while vested interests resist major changes.

“Their process is hermetically sealed, making it difficult for outsiders to know what is going on,” says Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics.

Beijing is reluctant to bail out crisis-hit local governments for fear that doing so could make them dependent on bailout packages. As a result, the central government intervenes only in emergencies, leaving local governments to solve their debt problems themselves.

“There’s a saying in Chinese: you help people in need, but you don’t help the poor,” says Tang Yao, an economist at Peking University. “You don’t want them to rely on soft money.”

Economists believe that intervention may be necessary this time. In addition, the central government has room to take on more debt, as the debt ratio is only around 25 percent of gross domestic product. This is significantly less than in many other large economies.

According to the National Institute of Finance and Development, total non-financial debt is estimated to be almost three times the economic output and continues to rise.

“This is a huge structural problem that requires a huge structural solution that doesn’t exist,” said Logan Wright of independent research firm Rhodium Group. “There’s really no way out. And it’s getting worse, not better.”