This is a very complicated policy area. Vehicle tax policy impacts the overall economy, the important auto industry, air quality and pollution, and of course applicable revenue usage by parts of the government.

Looking at things like emissions standards, incentives given to the auto industry, trade issues in this sector, and infrastructure/transportation initiatives helps to understand the relative importance of the industry to the government, both in terms of economic power as well as political influence.

See how many policy areas, explicit and implicit, you can spot in this Caijing article about the purchase tax:

For several months after China halved the car purchase tax rate January 20, vehicle sales soared. Sales Dealers sold 4.96 million units during the first five months of 2009, up 14 percent year-on-year, raising the possibility that annual sales could surpass 10 million.

But the good times passed quickly. The trend reversed course in June; passenger car sales fell 16 percent in the first week of that month alone.

The car industry is considered an important growth engine for China’s gross domestic product. So when the government last year implemented a series of policies aimed at stimulating the economy, measures to boost the auto industry were rolled out first, and the purchase tax rate was ordered cut in half for cars whose engines don’t exceed 1.6 liters.

The cut pointed to China’s heavy tax rate for new cars. Indeed, taxes now account for 30 percent of a vehicle price – even after the recent revocations of six types of road maintenance taxes. Components include a 17 percent value-added tax, sales taxes ranging from 3 to 20 percent, and a 10 percent purchase tax.

The purchase tax, formerly called a “vehicle purchase surcharge,” took effect May 1, 1985, on order from the Ministry of Transportation and after being approved by China’s cabinet, the State Council. It applied to all vehicles in China.

The Ministry of Transportation collected 18 billion to 20 billion yuan a year in purchase surcharge a year before 2001 and distributed the funds among the nation’s provinces in line with needs of different regions.

In theory, fees should be used for road construction and maintenance, but a certain percentage was used to pay ministry employees. The fee was called a purchase tax after January 1, 2001, and collected by tax authorities, yielding 25.5 billion yuan in revenues that year.

The government soon realized that the purchase tax greatly limited car sales. But it brought in so much money that the Ministry of Finance considered it hard to replace with any other method for financing road construction. Therefore, the purchase tax has continued to this day.

Industry insiders say once the latest purchase tax rate discount is lifted, car sales may fall quickly.

Dong Yang, deputy director of the China Car Industry Association, said the association has suggested an extension of the reduction. But officials overseeing the car industry at the National Development and Reform Commission said the tax cut will not be extended, although collection standards may be amended.