Across China, many local governments are on the brink of insolvency. Some cities have cut wages for civil servants. Cuts in municipal health insurance have led to street protests.
Central government bailouts are one way to rescue cities from their deep budgetary problems, but China has failed to focus on a source of revenue that would be obvious in other countries: property taxes.
In China, where the government owns the land, municipalities almost never tax homeowners to support services such as schools. Cities instead rely on selling long-term leases to real estate developers. The income from these land sales has plummeted in 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 owns 790 million apartments and other properties. That knowledge means officials in Beijing can launch a nationwide property tax system. But they are not expected to do so any time soon. The obstacles range from technical (it would be complicated) to economic (it would hurt homeowners in a delicate time for the housing market) to political (it would expose government officials who own many homes.
The idea of introducing a wealth tax is not new. The Central Committee of the Communist Party, in many ways China’s highest decision-making body, decided in 2003: “If circumstances permit, a uniform 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 appropriate form 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 from the 1940s to the 1960s, confiscating it from wealthy families—who were murdered in droves—and transferring ownership to the state. Since the 1980s, local governments have covered much of their costs for road construction, school operations, and other activities by leasing large tracts of land to developers.
Until last year, land lease sales accounted for 7 percent of the Chinese economy. By comparison, the average for property taxes in the 38 industrialized democracies in the Organization for Economic Co-operation and Development is 1.9 percent.
The United States in particular is dependent on property taxes. Local governments collect 3 percent of the country’s gross domestic product each year through these taxes and spend a large portion of it on public schools.
For China, raising money through land leases worked well for a long time. But a slow-motion crash of the housing market has led to bond defaults from dozens of developers, who are struggling to complete apartment projects, let alone buy land for new projects.
Revenue from land sales in recent decades has allowed China to keep other taxes low. Although China calls itself a socialist country, it has practically no taxes on investment gains, inheritances or personal wealth. State and local governments rely on a regressive combination of heavy sales tax, payroll tax, and business tax, in addition to ground lease payments to developers.
What’s stopping China from imposing a property tax?
Public resistance to a property tax is high. Apartment owners believe property taxes should be the responsibility of developers, who have already paid the government handsomely for the land to build homes on.
“The common complaint is, ‘We’ve already paid so much for an apartment that there’s no way we’re going to pay property taxes,'” said Shitong Qiao, a law professor at Duke University.
Another difficulty is that local officials, charged with coming up with a property tax, have a lot to lose. One advantage of civil servant jobs was the chance to buy apartments for little or nothing, especially in the 1990s.
With some apartments in major cities selling for several million dollars, and senior city officials earning as little as $30,000 or $40,000 a year, imposing an annual 1 percent tax could take their entire income. A tax could also expose the wealth of officials speculating in land.
The introduction of a property tax could drive house prices down at a time when construction is weak in all but the largest cities. Many homeowners are already worried about losing money on their apartments.
“The smaller cities have a greater need for property taxes to balance their budget deficits, but their housing market is also not as strong as in the big cities,” said Zhu Ning, a professor at the Shanghai Advanced Institute of Finance.
What can China do to start taxing real estate?
Last year, the central government examined whether to introduce a “gentlemen’s tax” on China’s biggest and fanciest apartments and houses, said two people familiar with China’s economic policymaking who insisted on anonymity because they were not authorized to do it. discuss the subject in public.
But a mansion tax has not moved forward out of concern that it could damage already fragile confidence in the housing market, both people said.
A long-term option suggested by foreign experts, such as Professor Qiao, is to require apartment owners to start paying taxes when the original leases on their buildings expire.
A few early leases after Mao’s death were for only 20 years and have expired.
But the most recent residential leases are for 70 years. Waiting decades to tax many apartments would not help China cope with the current fiscal crisis.
Jia Kang, a former finance ministry research director who still advises the ministry, said completing the property registration system meant China was nevertheless making progress towards introducing a property tax at some point.
“The unified registration of real estate is the most basic condition for optimizing the management of the real estate market,” he said. “It will also play a role in supporting a future property tax.”
Li you contributed research.
