Opinion: Why China Is Trying Out a Property Tax

To better understand China’s recently announced pilot property tax, several questions need to be answered first: What is the difference between the new property tax (房地产税) and the existing real estate tax (房产税)? What kinds of taxes are there in China’s real estate sector? And how much government revenue does the real estate industry contribute?

The pilot property tax is chiefly targeted at residential homes in urban areas, while the real estate tax, which has already existed in China for 35 years, is mainly targeted at properties for commercial use.

It is the pilot property tax that has caused heated public discussion, not the real estate tax, although their names in Chinese are very similar. The real estate tax has existed for a long time in China, coming into effect as early as Oct. 1, 1986. The real estate tax doesn’t touch properties for noncommercial use that are owned by individuals.

There are many kinds of real estate-related taxes in China. These taxes and land sales revenue collectively contributed 35.9% of the country’s government revenue in 2019.

Since China’s market-oriented reform of real estate in the 1990s, the industry has developed rapidly. It brought momentum to the growth of GDP, created job opportunities, made contributions to the government’s fiscal revenues, drove the development of many upstream and downstream suppliers and promoted economic and social development.

However, the development of the property industry has generated huge debts, triggering the interweaving of real estate, fiscal and financial risk. Meanwhile, surging housing prices have widened the gap between rich and poor, triggering social anxiety, impeding innovation and consumption and increasing costs in manufacturing.

Government revenue contributed by the real estate industry consists of property-related taxes and land sales revenues, which are managed under the national general public budget and the budget of government-managed funds, respectively.

Overall, China’s taxation in the real estate industry has several characteristics: First, it focuses on new properties rather than existing ones. Second, taxes are heavier on those who develop or trade properties, but lighter on those who hold onto them. Third, China has many kinds of real estate-related taxes, some of which may be integrated with the property tax in the future.

According to the 2019 China Taxation Yearbook and the Ministry of Finance, the tax revenue contributed by the real estate industry was 2.62 trillion yuan ($410 billion) in 2019, accounting for 16.6% of the country’s tax revenue and 13.8% of its general fiscal revenue. Government revenue from land sales amounted to 7.25 trillion yuan in 2019, accounting for 85.8% of the total revenue under the budget of government-managed funds. Calculations from the two budgets show that the real estate industry contributed 9.87 trillion yuan, or 35.9%, to China’s government revenue in 2019.

Why is China piloting a new property tax?

Levying a property tax is inevitable. There are five reasons for this.

First, no matter what tax, its first function is to raise fiscal revenue, which, at present, is probably more important than ever. After China tightened regulatory restrictions on the real estate industry, the land market has become stagnant, reducing local governments’ land sales revenue rapidly, especially in cities that are highly dependent on this revenue. Therefore, it is necessary to have new types of taxes to make up for the shortage of land revenue. In September, the total land sales revenue of local governments dropped 11.2% year-on-year, which was the third straight month of decline.

Second, the property tax can facilitate the fair distribution of property-related wealth, and promote common prosperity.

Third, as the government insists on the stance that housing is for living in but not for speculation, and wants the country to develop from a property-booming country to a technology and manufacturing powerhouse, property tax is a must as it is conducive to the stable and healthy development of the real estate market.

Fourth, the property tax is beneficial to the construction of local tax systems. After China replaced business tax with value-added tax (VAT), local governments had to depend more on a limited type of taxes, including land VAT, deed tax and urban land use tax — they are basically minor taxes and only contribute limited tax revenue to local governments. To improve local tax systems in the future, property tax is a very good part, because local governments can know very clearly how many properties are owned by local residents and how much tax is appropriate.

Fifth, a future trend of China’s tax reform is increasing the proportion of direct taxes — taxes that entities pay directly to the government — in the taxation system. And property tax is a type of direct tax.

Can property tax lower house prices?

Property tax doesn’t directly impact house prices. A theory of how property tax influences house prices says that tax adds the cost for people to hold properties, thus reducing the demand for property investments. At the same time, some people may sell their excess house properties, which would increase property supply on the market and lead to a fall in housing prices. But if the cost of holding a property is lower than the expected growth of properties on the market, people would apparently choose to keep their properties.

Property tax will mainly affect expectations of property owners in the short term. The price of real estate ultimately depends on the supply and demand sides, that is, land and population. Taxation is not omnipotent, and tax adjustment is just one of the price adjustment tools.

Possible directions of China’s pilot property tax reforms

1) The government may choose cities with the following four characteristics for piloting the property tax: cities where housing prices have risen rapidly, and the ratio of house prices to residents’ income is relatively high; cities where local governments have relatively strong tax collection and management capacity; cities where properties have clear ownership; and lastly, cities that are taking the lead in advancing common prosperity.

In terms of housing prices, Shenzhen, Sanya, Shanghai, Beijing and Xiamen ranked top five in China in 2020, with the house price-to-resident income ratios all higher than 20, meaning that buying a house in those cities will cost a resident more than 20 years-worth of income. The ratio in Shenzhen was close to 40 last year. Shenzhen has one of the highest house price-to-resident income ratios in the world, following Hong Kong, according to data from Numbeo, a global database of life information including housing indicators.

In terms of the growth rate of new housing prices from 2009 to 2020, Shenzhen, Guangzhou, Haikou, Beijing and Xiamen ranked top five in China. Actual home prices increased even more than the data suggests because of data collection bias, as more and more new houses are located in non-downtown areas. In terms of existing home prices, the four first-tier cities of Shenzhen, Beijing, Shanghai and Guangzhou witnessed the highest increases in these 12 years.

2) To ensure that the property tax has a better result, it may focus on existing homes.

At present, the continuous decline in the size of China’s population and the growing proportion of older people in the total indicates that demand for new housing will continue to decline. If the government only levies the property tax on new-home purchases, the tax will have a small impact and will hardly be able to play its role in raising fiscal revenue and promoting fairness in society.

3) The government could set a floor for property tax, for example, to exempt the tax on first home purchases. That would take into account everyone’s basic housing needs. In the meantime, the government can give tax concessions to special groups such as people with disabilities, charity funds and other nonprofit special organizations.

4) The property tax is a local tax. The central government may set a certain tax rate range for guidance, but the specific tax rate will be determined by local authorities.

5) The property tax may be collected based on market value. The value of properties may be assessed at a level lower than market value and will be updated dynamically.

6) Carrying out pilot programs, summarizing the experience and implementing finalized policies across the country is a very important methodology during China’s course of reform and opening-up. The government plans to carry out the pilot program of property tax over five years. It is expected to accumulate experience during this period, before promoting property tax legislation and expanding the scope of implementation.

Luo Zhiheng is deputy director of Yuekai Securities Co. Ltd.’s research institute.

This article has been edited for length and clarity.

Contact editor Heather Mowbray (heathermowbray@caixin.com)

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