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Is China Ready for a Property Tax?

 
 

Revealing a roadmap for an annual property tax, Chinese Finance Minister Xiao Jie lately indicated that this long-awaited initiative is being fast tracked, starting a new chapter in the housing market. Xiao suggested property tax legislation will be rolled out in March 2019, followed by nationwide taxation. Charged on estimated home prices, rather than market ones, the tax will be levied by local authorities. Most importantly, the current land-related taxes and fees will be reduced in both category and value, to be gradually replaced by a single tax.

To contain the damage from rounds of housing stimulation, China’s policymakers are stepping up efforts to fix some structural issues in the market, which had given rise to price volatility. Rental and subsidized homes will correct an over-commercialized market with few alternatives. Also, in a managed process, collectively owned land is being authorized for development without government acquisition. Bypassing local authorities, who pocket the majority of land added value, the new source of land supply will not only ease current market tensions but also create room for future price maneuvers. Although a nationwide property registry system, set to be effective in 2018, will extend important technical support, the tax marks an inevitable turn in China’s property market.

After repeated stimulation of the real estate market, especially this round, the financial market has built up significant risk, leaving little, if any room for mistakes. Guarding against financial risks has been the government’s top agenda item, reiterated at different high-profile events. Putting a positive shine on the topic, Chinese President Xi Jinping at the 19th Party Congress this October stressed the Party’s preference for growth quality over pace. Against this backdrop, it’s more likely than ever before that China will be retiring a growth model with the housing market as a key driver.

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The current land-related tax system, including taxes and fees, encourages construction and transactions, subjecting the market to speculations. After years of promotion of housing development, the tax system is extremely distorted, incentivizing quick construction and sales while overlooking sold homes. Among the dozen or so taxes and fees currently in place, only two are levied on end home users, with the rest on developers and the like. In terms of value, the 2016 budget showed developer income tax alone generated revenue of 3.64 trillion yuan ($550 billion). On the contrary, the two taxes on held homes contributed 448 billion yuan ($68 billion).

Lastly, as China’s property market matures, the reduced number of new homes will decrease demand for land, generating shrinking land sales fees in the long run. Since land sales fees account for a major proportion of local revenue, the market shift urges the central government to find new revenue sources for local governments. Official data show land sales fees likely peaked at 4.26 trillion yuan in 2014, decreased to 3.25 trillion yuan in 2015, and recovered to 3.75 trillion yuan in 2016. Although set to beat 2016 figures, it may be difficult for the 2017 amount — 3.60 trillion yuan as of October — to hit the 2014 record. With existing homes to exceed newly built ones, there is an irresistible drive for authorities to bring in an annual property tax on home users.

With a framework for the property tax in place, the government still faces other challenges ahead. First and foremost, a continued and stronger campaign against speculation is needed to reverse, if possible, public expectations, the strongest support for a housing boom in the short term. It has become household knowledge in China that restrictions imposed during boom times would be relaxed in lean times, resulting in ever bigger price hikes. Over a year after market tightening, even though transaction controls so far have curtailed sharper price increases in many cities, the public still expects home prices to go up, not down. With powerful self-fulfilling effects, this public expectation lures speculators to enter the market at any cost, driving up prices.

Second, although authorizing local governments to levy the tax will render great flexibility in tax rates and deductions nationally, the process could be prolonged, demanding skilled design. Because they currently generate the lion’s share of local revenue, it will take time to replace land sales fees without disrupting local finances. As any tax paid by the previous buyer could be easily passed down to the next, a smart structure to reverse this trend will challenge tax experts. Additionally, authorities will have to walk a tightrope to implement feasible tax rates without disturbing the market.

In the long run, a property tax is only part of the needed fixes for China’s housing market. To defuse the bubble, land supply and use efficiency should be increased, especially in megacities, while money creation should be slowed down. New investment alternatives should be in place for households to preserve their wealth as well.

Xinling Wang works for China Policy, a Beijing-based policy consultancy. 

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