China is accelerating the long-discussed plans to introduce a nationwide property tax. Experts say such a tax could be tested in some first- and second-class cities with hot real estate markets by the end of this year, most likely in Shenzhen and the southern island province of Hainan.
The central government has pondered a home ownership tax for years, and Shanghai and the southwest mega-city of Chongqing were selected in 2011 to attempt to impose taxes on certain homes. Since then, there has been much discussion about expanding the tests nationwide, although little progress has been made in a decade.
Local governments, worried, were reluctant to impose such a tax, which would cause property values to fall and dampen demand for land, which would hurt a major source of their tax revenue. Experts argue that this won’t be a problem.
On May 12, officials from the Treasury Department, the Department of Housing and Rural Development, the State Tax Administration, and the National Legislature’s Budget Commission held a seminar to seek opinions from experts and local government officials on pilot real estate taxes, according to an official Explanation.
Test before the legislation first
The brief statement sent a different signal than previous official remarks. The government has always talked about legislation and reform of property tax in the past, but this time the wording has been changed to “Pilot Trials of Property Tax Reform”. Some experts interpreted the change as a sign that the government wants to bring property taxes to justice before legislation is passed.
“Although the legislature has been drafting land tax laws for many years, a draft needs to be solicited for comments and discussed by the National People’s Congress,” said Shi Zhengwen, professor of tax law at China’s Political Science and Law University. “In general, a new law is reviewed three times, so it will take at least a year or two.”
Caixin learned that lawmakers drafted a property tax bill in 2018 and sought comments from local governments and relevant ministries, but it has not yet been submitted to the National People’s Congress for deliberation.
The bill is currently being finalized and submitted to lawmakers for preliminary review “when the conditions are ripe,” said Wu Ritu, vice chairman of the NPC’s Legislative Affairs Commission, in March 2019. No updates have been made since then.
It seems that the authorities intend to start a pilot run before a new law is enacted as the legislative process has encountered some difficulties, said Liu Yi, a financial policy professor at Beijing University.
Shi said he expected a pilot program to start in some cities this year. Several experts said the pilot cities should be representative of first and second tier cities. Among the prime cities, Shenzhen is most likely chosen. In terms of secondary cities, options include urban areas with good economies and hot housing markets, said Ma Guangyuan, economist and real estate commentator.
Jia Kang, chief economist at the Huaxia New Supply Economics Research Institute, has called for pilot tests to examine property taxes in Shenzhen and Hainan. Shenzhen, the pioneer demonstration zone for China’s reform and opening up, and Hainan, with the world’s largest free trade port zone, have been given greater restructuring autonomy, making them suitable for property tax auditing, experts say.
Running a pilot program can also help expedite legislation by addressing issues that may arise after the new tax is officially launched, Shi said.
Although opinions differ on the order of the legislation and the pilot programs, many researchers believe that property tax legislation should be completed by the 20th Five-Year Plan by 2025.
Long-term tool for local government
The central government needs long-term measures to regulate the real estate market. A property tax that combines legal and economic measures could be a good long-term tool with multiple functions, e.g. For example, adding to local tax and tax systems, improving state and national governance, and adjusting income distribution, Shi said.
China’s house prices grew at the fastest pace in eight months in April after the curbs failed to curb buyer enthusiasm. Prices for new homes in 70 cities, excluding government-subsidized housing, rose 0.48% last month from March, when they rose 0.41%, according to figures released Monday by the National Bureau of Statistics.
Rising house prices are causing China to rush property taxes, but this is not the main reason. As the new tax will increase the cost of owning real estate, it is widely believed that it will discourage speculation and curb house prices.
However, the trials in Chongqing and Shanghai showed that property taxes had only a limited impact on property prices. The same applies to other countries that have introduced property taxes. Beijing has downplayed this narrative since 2010.
There are two main factors that affect property prices: land supply and monetary policy. Property taxes, or the absence of them, have minimal impact when compared to the two main factors, real estate development tycoon Pan Shiyi said.
Experts like Shi told Caixin that the introduction of property taxes could dampen property prices in the short term, but is not intended to regulate property prices in the long term.
The main purpose of such a tax is to provide local governments with a stable source of income. A revision of the tax revenue distribution system in 1994 diverted the lion’s share of the country’s tax revenue from regional and local governments to central government. For example, 45% of China’s tax revenue was turned over to the central government last year, a sharp increase from 22% in 1993. Given the weak growth in tax revenue, some local governments rely heavily on the sale of land use rights to cover costs such as infrastructure – and social programs.
The country’s recent tax cuts to aid economic recovery have further damaged local government finances. Data from the Treasury Department shows that tax revenue decreased by 3.9% and tax revenue by 2.3% in 2020.
Legal basis for property tax
Land tax opponents also question the rationale of imposing a tax on homes built on land that homebuyers do not even own.
Until the early 1990s, most of the city’s houses were state owned and provided through work units. However, the government began to privatize public housing and encourage private property development to stimulate the economy. Homeowners in China own their homes, but not the land below them. All land in China is owned by the government, which sells land use rights to developers and homeowners for 20 to 70 years.
“It is an important legal lesson that property taxes cannot be levied on state-owned land,” said Xu Shanda, former deputy head of the state tax administration. “Although Chinese real estate owners own the building, the land is owned by the state.”
However, Liu Jianwen, a law professor specializing in tax and economics at Beijing University, claims that this legal obstacle was removed when the Property Law came into effect in 2007. The law defined rights to use land for building purposes as “almost synonymous with property rights,” he said.
Internationally, there are many examples of countries that levy property taxes on houses built on public land. Countries like Singapore, Israel and Australia have coordinated the relationship between public land use rights and home ownership within their legal framework.
Although China does not have a statewide property tax, there are many types of taxes levied on real estate development and transactions, including farmland occupation tax, urban land use tax, property tax, property tax, corporation tax, income tax, and stamp duty. There have long been arguments that the tax burden is too high during the construction and transaction process, while taxes are too low during the ownership phase.
According to the Treasury Department, property tax receipts last year were 1.96 trillion yuan ($ 305 billion), or about 20% of local government’s annual income.
Former Finance Minister Xiao Jie has proposed that the tax burden be reduced accordingly during the construction and transaction process when a new property tax is levied.
Some experts suggest removing property tax. The tax, which has been in force since 1994, was introduced after the housing bubble in the early 1990s.
It is imposed on developers at progressive rates between 30% and 60%, depending on the level of appreciation of the land use rights assignee. The tax is typically passed on from developers to homebuyers.
Regardless of when and how the property tax is collected, it is certain that it will affect land use sales by local governments, according to a report by realtor Guotai Junan. In the past, local governments have usually adjusted the supply of land to market demand. Once a property tax is in place, local governments will be motivated to sell more land use rights in order to collect more property taxes in the future, the report said.
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