All over China, there are many local governments on the brink of bankruptcy. Some cities have reduced salaries for civil servants. Cuts to municipal health insurance sparked street protests.
Central government bailouts are a possibility to rescue cities from deep budgetary problems, but China has not turned to a source of revenue that would be an obvious option in other countries: property taxes.
In China, where the government owns the land, the regions almost never tax homeowners to subsidize services such as schools. Cities rely instead on selling long-term leases to real estate developers. Revenue from these land sales has declined in the past year.
Last month, after a decade-long effort involving 100,000 workers, China’s central government said it had finally found out who owned up to 790 million apartments and other property. This knowledge means that officials in Beijing can initiate a nationwide property tax system. But they are not expected to do so quickly. Obstacles range from technical (which would be complex) to economic (which would hurt homeowners at a sensitive time for the housing market) to political (which would expose government officials who own many homes).
The idea of introducing a property tax is not new. The Central Committee of the Communist Party, in many ways China’s highest decision-making body, decided in 2003: “When conditions permit, a unified and unified property tax will be levied on real estate.”
Many economists support the estate tax, notably Lu Jiuyue, a retired finance minister who remains an intellectual leader among China’s technocrats. “The real estate tax is the most appropriate type of tax as a local tax, and it should be tried as soon as possible after the economy returns to normal growth,” he wrote in February.
Mao Zedong, the founder of communist China, nationalized China’s land from the 1940s through the 1960s, seizing it from wealthy families—who were killed in droves—and transferring ownership to the state. Since the 1980s, local governments have covered many of their costs for road construction, school operations, and other activities by leasing large blocks of that land to developers.
Until last year, land rental sales accounted for 7 percent of the Chinese economy. By comparison, the average property tax in the 38 industrial democracies in the Organization for Economic Co-operation and Development is 1.9 percent.
The United States is particularly dependent on property taxes. Local governments collect 3 percent of the country’s GDP each year through these taxes and spend much of it to pay for public schools.
For China, fundraising through land leases has worked for a long time. But the slow collapse of the housing market has caused bond defaults by dozens of developers, who have been left struggling to finish housing projects, let alone buy land for new developments.
Revenues from land sales over the past several decades have allowed China to keep other taxes low. Although China calls itself a socialist country, it does not tax investment gains, inheritance or personal wealth. National and local governments rely on a regressive mix of exorbitant sales taxes, payroll taxes, and business taxes, as well as land leases to developers.
What prevents China from imposing a property tax?
Public resistance to property tax is strong. Apartment owners believe that real estate taxes should be the responsibility of developers, who have already paid the government large sums of money for land for housing construction.
“The general complaint is, we’ve already paid so much for an apartment that it’s also impossible to pay real estate tax,” said Xitong Qiao, a Duke University law professor.
Another difficulty is that local officials, who are responsible for imposing a tax on real estate, have a lot to lose from a single tax. One of the benefits of civil service jobs was the opportunity to buy flats for little or nothing, especially during the 1990s.
With some apartments in major cities selling for several million dollars, and with top municipal officials earning $30,000 or $40,000 a year, a 1 percent annual tax could claim their entire income. The tax could also reveal the wealth of officials speculating on the land.
The introduction of a property tax could drive down housing prices at a time when construction in all but the largest cities is sluggish. Many homeowners are already worried about losing money on their apartments.
“Smaller cities have a greater need for property taxes to balance their budget deficits, but their housing markets are also not as strong as in big cities,” said Zhou Ning, a professor at the Shanghai Institute for Advanced Finance.
What can China do to start taxing real estate?
Last year, the central government considered whether to introduce a “mansion tax” on China’s largest and most luxurious apartments and houses, said two people familiar with China’s economic policy-making who insisted on anonymity because they were not authorized to discuss the matter publicly.
But both people said the mansion tax has not been advanced because of concern that it could damage already fragile confidence in the housing market.
A longer-term option suggested by outside experts such as Professor Qiao is to require apartment owners to start paying taxes when the original leases on their buildings expire.
Some early land leases were after Mao’s death for 20 years, and had expired.
But the most recent residential land leases were 70 years ago. Waiting decades to tax many apartments will not help China deal with its current financial crisis.
Jia Kang, a former research director of the Ministry of Finance who still advises the ministry, said the completion of the real estate registration system means China is nonetheless making progress toward enacting a real estate tax one day.
“The unified registration of real estate is the basic prerequisite for better management of the real estate market,” he said. “It will also play a role in supporting a future estate tax.”
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