Across China, many local governments are on the verge of insolvency. Some cities have cut salaries for civil servants. Cuts to municipal health insurance sparked street protests.
Central government bailouts are one possibility to rescue cities from their deep budget 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, localities almost never tax landlords to support services like schools. Instead, cities rely on selling long-term leases to real estate developers. Revenue from these land sales has declined over the past year.
Last month, after a decade-long effort involving 100,000 workers, China’s central government said it had finally figured out who owned 790 million apartments and other properties. That knowledge means Beijing authorities can initiate a nationwide property tax system. But they are not expected to do so quickly. Obstacles range from the technical (it would be complicated) to the economic (it would hurt homeowners at a sensitive time for the real estate market) to the political (it would expose government officials who own a lot of homes).
The idea of introducing a property tax is not new. The Communist Party Central Committee, in many ways China’s highest decision-making body, decided in 2003: “When conditions permit, a unified and standardized property tax will be levied on real estate.”
Many economists support a property tax, most notably Lou Jiwei, a retired finance minister who remains an intellectual leader among China’s technocrats. “A property tax is the most suitable type of tax as a local tax and should be tested 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 between the 1940s and 1960s, taking it from wealthy families – who were killed in large numbers – 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 this land to developers.
Until last year, land lease sales accounted for 7% of the Chinese economy. By comparison, the average property tax in the Organization for Economic Co-operation and Development’s 38 industrialized democracies is 1.9%.
The United States is particularly dependent on property taxes. Local governments collect 3% of the country’s gross domestic product each year through these taxes, and spend much of it to pay for public schools.
For China, raising money through land leases worked well for a long time. But a slow housing market slump has triggered defaults by dozens of developers as they struggle to complete apartment projects, let alone buy land for new ones.
Revenue from land sales in recent decades has allowed China to keep other taxes low. Although China calls itself a socialist country, it has virtually no taxes on investment gains, inheritance or personal wealth. National and local governments rely on a regressive combination of heavy sales taxes, wage taxes and business taxes, in addition to land leases to developers.
What prevents China from imposing a property tax?
Public resistance to a property tax is strong. Apartment owners believe that property taxes should be the responsibility of developers, who have already paid the government handsomely for land on which to build housing.
“The general complaint is, ‘We’ve already paid so much for an apartment that there’s no way we can also pay a property tax,’” said Shitong Qiao, a professor of law at Duke University.
Another difficulty is that the local authorities, charged with drawing up a property tax, have a lot to lose. One advantage of government jobs has been the chance to buy apartments for little or nothing, particularly during the 1990s.
With some apartments in big cities selling for several million dollars and senior city officials making only $30,000 or $40,000 a year, imposing a 1% annual tax could claim all of your income. A tax could also expose the wealth of officials speculating in land.
The introduction of a property tax could lower housing prices at a time when construction in all but the largest cities is sluggish. Many landlords 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 property markets are also not as strong as in big cities,” said Zhu Ning, a professor at the Shanghai Advanced Institute of Finance.
What could China do to start taxing real estate?
Last year, the central government considered introducing a “mansion tax” on China’s largest and most upscale apartments and homes, said two people familiar with China’s economic policy who insisted on anonymity because they were not authorized to discuss the issue publicly.
But a tax on the mansions has stalled because of concerns it could damage already fragile confidence in the property market, the two people said.
One long-term option suggested by foreign experts like Professor Qiao is to require apartment owners to start paying taxes when the original leases on their buildings expire.
Some of the first land leases after Mao’s death were for just 20 years and expired.
But the most recent residential land leases are for 70 years. Waiting decades to tax many apartments would not help China deal with its current fiscal crisis.
Jia Kang, a former director of research at the Ministry of Finance who still advises the ministry, said the completion of the property registration system means China is still making progress towards one day passing a property tax.
“The unified property registry is the most basic prerequisite for optimizing the management of the real estate market,” he said. “It will also play a role in supporting a future estate tax.”
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