Just
over a year ago, the Chinese government took the
unprecedented step of launching a trial property
tax in response to rising real estate prices.
Since the mid-2000s in China, real estate prices
have been going through the roof. In 2010, home
prices in Shanghai rose 26.1% and in Chongqing,
29.4%, according to Soufun Holdings, China's
biggest property website.
The tax,
announced by the Ministry of Finance's Tax Policy
Department on December 2010, marks a significant
departure from pre-existing taxation policies,
which include a one-time transaction fee for
residential sales and a minimal tax on commercial
real estate.
The property tax also may
represent a new step forward for China's market
liberalization in that it will require new
institutions and systems such as land and property
registration that could
lead to stronger private
ownership laws and other aspects of a more liberal
economy.
As significant as the property
tax may become, however, it is far from clear
whether the property tax is having the intended
effect on the real estate market or whether it
will resolve local governments' financial woes.
Trials and tribulations of the property
tax Shanghai and Chongqing were announced
as the trial cities for the new property tax, and
began levying it on January 28, 2011. The cities
were given the power to set the details of the tax
themselves, leading to a number of differences.
For one, the Chongqing tax includes pre-existing
and new properties, while Shanghai taxes only
properties purchased after January 28.
The
Chongqing tax is on a sliding scale. Based on the
transaction price, villas and apartments priced
less than three times the average price will be
taxed 0.5% annually, those priced three to four
times the average price will be taxed 1% annually,
and those four times or higher will be taxed 1.2%.
In Shanghai, the property tax applies to
Shanghai residents purchasing their second homes
or non-residents purchasing their first homes. To
be subject to the tax, the area of the second
home, when added to that of the first home, must
exceed 60 square meters per person. The value of
the home determines tax rate. If the value is less
than double that of average prices, the rate is
0.4%. If it is more than double, the rate is 0.6%
with the tax calculated on 70% of the home's
purchase price.
The property tax goes in
tandem with other slowing measures, such as
increases in bank reserve ratios and increasing
down payments, and would ostensibly cool the real
estate market by increasing the holding costs of
properties and, thus, reducing speculation.
Ideally, it would in the long term adjust the
market and reduce inefficiencies, preventing a
property bubble.
Chinese officials also
have noted the tax is intended to narrow the
income gap and provide social assistance,
partially by using property tax revenue to build
low-income housing.
A year later, what is
the status of this tax? Has it accomplished what
it was established to do or have there been other
consequences?
In the short term, research
conducted by the Chongqing Municipal Land
Resources and Housing Administrative Bureau showed
a precipitous drop in visits to sales offices of
high-end properties (30-50% ), and showed that
from January 28 to November 30, 2011, the sale of
high-end housing fell 4.1% from 2010 in Chongqing.
In the long-term, however, there are a
number of bureaucratic factors involved in the
implementation of the tax and pre-existing
structural issues that give us real reason to
believe that the tax will not dampen property
sales in the long-term.
For example, at a
seminar in Wuhan in September 2011 on provincial
taxation bureaus in China, Qiu Xiaoxiong, deputy
director of the State Administration of Taxation,
noted in a speech that there was a long way to go
to effective tax administration, noting problems
such as "a lack of unified planning for the design
of various tax categories," an "over-centralized
tax administration authority" and "the quality of
ranks of cadres".
Indeed, there are a
number of challenges confronting effective
implementation. First, there is the question of
how to calculate the property tax. Chongqing and
Shanghai are basing the tax on average market
price, but that number varies depending on what
statistics one uses. Also, there is the issue of
the cost of the home/apartment itself: the tax
could be levied on the sale price, or on an
evaluated price. There are pros and cons to both.
The sale price may undervalue housing prices,
while an evaluated price, though more accurate,
would be nearly impossible logistically to
determine.
There is also the issue of how
to collect the property tax. The proper collection
of a property tax requires a massive
administrative infrastructure that can assess
property values. Nie Meisheng, president of the
China Real Estate Chamber of Commerce, noted that
this is a "a hard nut to crack" because the
implementation of the property tax "needs millions
of professional appraisers and a long time to
assess the value of properties". It will be
difficult to develop this professional capacity,
which will require training for officials for the
whole property valuation process -
appraisal/evaluation, appeals and collection.
Data may also present a problem. A
value-based tax would require a data set that
according to scholar Ding Chengri has
"historically ... not been collected
systematically", or is "stored in different
locations and in paper format. ... the Ministry of
Land and Resources records and handles
land-related data and information, whereas the
Ministry of Construction is in charge of
structure-related information." [1].
What
about those who evade the tax? In Chongqing, those
who do not pay their tax will be subject to fines
or will be unable to travel overseas, though it is
uncertain how easy these punishments will be to
dodge. For instance, it may be possible that the
scofflaw could move to another locality. There is
little information available about the
consequences for disregarding these penalties.
Bureaucratic complexity also may pose a
problem. Among the organizations involved in the
tax are the Ministry of Finance, the State
Administration of Taxation and the Ministry of
Housing and Urban-Rural Development. Though the
involvement of multiple agencies is not inherently
problematic, ministries in China often have
conflicting interests, and separate bureaucratic
identities may present coordination issues.
The more significant issue may be the
involvement of local governments, which also are
involved heavily in the process. They are
responsible for setting the tax rate, the tax
standards and when to introduce the tax. Local
governments however face a number of
counter-incentives for proper implementation.
First, many local officials have their own
hands in the real estate market, or have close
personal ties with those that do. Second,
competition between local governments to attract
investors and buyers may develop with officials
offering artificially low property tax rates or
declining to implement the property tax at all. As
will be discussed later, as a result of the tax
share system between the central and local
governments, local governments often have
counter-incentives to implementing central
policies.
Additionally, there are also
structural issues that may keep real estate
afloat. First, there is a paucity of alternate
investment opportunities, in terms of both
quantity and quality. Banks are not seen as a good
option by many Chinese, both because there is no
Chinese equivalent to the US Federal Deposit
Insurance Corporation and periods of political
instability and rampant inflation have made
Chinese consumers distrustful of banks.
Even if banks were positively perceived,
the financial benefits are limited. Interest
rates, kept low to spur consumer spending, are
often outpaced by inflation rates. Overseas
investment is also not a viable option as Chinese
citizens are largely restricted from investing
abroad. Finally, returns from the stock market are
no competition for real estate returns.
On
a macro-level, urbanization is continuing at a
breakneck pace, which supplies the demand needed
to maintain such high prices. The urbanization
rate is expected to rise 10% age points in less
than 10 years - from 47% in 2011 to 57% in 2020.
In terms of suppressing housing prices,
the problem of implementation is just one of the
factors that could nullify the tax's impact. In
the case of Hong Kong, despite an annual 5% tax on
the assessed value of a property, the assessed
value is so below the actual market value that the
effective tax rate is minimal. So far, it has not
significantly affected real estate sales. Of
course, Hong Kong's 5% is a great deal higher than
those currently in place in Chongqing and
Shanghai.
So if the property tax may not
dampen prices, what will it do? The most important
impact of the property tax will be its role as a
carrot to focus on qualitative development for
local governments, who depend on revenue from land
sales and building construction. Beijing's efforts
to rein in growth is choking that revenue off,
leaving local governments mired in debt.
Fiscal decentralization, instituted in the
mid-1990s, reduced local governments' share of the
central revenue stream, but increased their
responsibility for providing social goods. Local
governments are currently responsible for 80% of
public spending, but receive just half total
government tax revenue.
Local governments
have become desperate for revenue streams, and
real estate is an excellent source. Officials can
appropriate land or buy land at very low cost and
sell it to developers for a tidy profit. Land
revenue is particularly attractive as it counts as
extra-budgetary income, which does not count in
the central government's accounting of local
government budgets. This means local governments
are allowed to retain all monies received and
spend it however they wish.
As a result,
the revenue coming from commercial and residential
land leasing and sales have become a crucial part
of local government budgets. According to the
Ministry of Land and Resources, land-transfer fees
totaled 1.59 trillion yuan (US$233 billion) in
2009, which accounted for 24% of China's total
fiscal revenue. These revenues are used to attract
investment, build substantial public works
projects and provide services.
Tightening
measures launched in 2010-2011 have put a dent in
these crucial revenues: one report shows that
"land sales in 130 major cities fell 30%
year-on-year to reach 1.18 trillion yuan during
the first 11 months of the year".
There is
hope that revenue from a property tax would help
to relieve local governments' addiction to land
sales by providing a more consistent form of
revenue. This is important for two reasons. First,
reducing local government dependence on land sales
would help to cool rising real estate prices.
Second, the revenue from land sales and leasing
cannot be expected to last forever - there is a
finite amount of land in China and if the price
bubble pops, revenues from these sources will
plunge.
Reducing local government
dependence on land sales may also help to reduce
social unrest, which is often caused by farmers
protesting the unlawful seizure of their land or
inadequate compensation for their land.
A difficult future The property
tax, however, cannot be relied on as a short-term
(or even medium-term) fix for rising housing
prices - it faces too many implementation
challenges and is too limited at present. If and
when the property tax becomes a legitimate revenue
generator, it has the real potential to fix the
central-local fiscal divide and minimize some of
the negative externalities that have resulted from
it, including excessive land appropriation and
mismanaged growth. In short, it may have a much
more positive impact than just slowing housing
prices in the short-term.
It is expected
that the government will expand the tax to more
cities this year, including potentially Guangzhou
and Nanjing. Additionally, in order to counter
potential implementation problems, China will be
launching a database this year that will include
housing information for 40 major cities.
The tax has the potential to be a major
source of revenue. In 2009, property taxes
accounted for over 4% of Great Britain's gross
domestic product, about 3.5% of Canada's, and just
over 3% of the United States'. Indeed, a major
report issued in February 2012 by the World Bank
and China's Development Research Center calls for
social spending in China to be drawn more from
property taxes (among other sources) than from
land sales. The report also points to the property
tax as an incentive for local governments to focus
on maintaining property values rather than turning
them over [2].
Implementation problems,
however, could keep property taxes from becoming a
reliable revenue stream. In the first 10 months of
the tax in Chongqing, revenues from the tax
accounted for just 0.2% of Chongqing's total tax
revenues for that period due to the limited scope
of the tax, which affected just 8,500 homes.
Additionally, if property prices fall, so
will property tax revenues. The property tax has
the potential to be a game-changer in terms of
central-local fiscal relations, but only time will
tell whether the Chinese state can overcome the
bureaucratic and logistic hurdles it faces trying
to collect on the property tax.
Notes: 1. Ding, Chengri.
"Property
Tax Development in China", Land Lines: July
2005, Volume 17, Number 3. 2. China 2030:
Building a Modern, Harmonious and Creative
High-Income Society, World Bank and the
Development Research Center of the State Council,
February 2012, pp. 23, 44-45, 102–103.
Eve Cary graduated from
University of California, Berkeley with a Masters
in Asian Studies, with a focus on China. Her
research focuses on Chinese domestic politics,
overheating and real estate issues, and
central-local relations.
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