The Elusive Fix for China’s Budget Crisis

Across China, many local governments are on the brink of bankruptcy. Some cities have reduced salaries for civil servants. Municipal health insurance cuts have sparked street protests.

A central government bailout could save the city from severe budget problems, but China has not turned to property taxes, an obvious option in other countries.

In China, where the government owns land, local governments rarely tax homeowners to support services such as schools. Cities rely instead on selling long-term leases to property developers. Revenues from these land sales have plummeted over the past year.

Last month, China’s central government announced it had finally figured out who owns 790 million apartments and other properties after a decade-long effort involving 100,000 workers. That knowledge means Beijing officials can start a nationwide property tax system. But they are not expected to do so anytime soon. Obstacles range from technical (complex) to economic (hitting homeowners at a sensitive time for the housing market) to political (putting government officials who own many homes at risk). (to be exposed to).

The idea of ​​introducing a property tax is not new. The Central Committee of the Communist Party of China, in many respects China’s supreme decision-making body, passed a resolution in 2003 to “impose a unified and standardized property tax on real estate, conditions permitting.”

Many economists support a property tax, especially Lu Ziwei, a former finance minister who remains an intellectual leader among Chinese technocrats. “The property tax is the most suitable local tax and should be introduced on a trial basis as soon as possible after the economy returns to normal growth,” he wrote in February.

The founder of the Chinese Communist Party, Mao Zedong, nationalized China’s land from the 1940s to the 1960s, taking it from wealthy families who suffered numerous casualties and transferring ownership to the state. Since the 1980s, local governments have funded much of the cost of building roads, running schools, and other activities by leasing large portions of their land to developers.

Until last year, land lease sales accounted for 7% of China’s economy.By comparison, the average property tax for 38 advanced democracies from the Organization for Economic Co-operation and Development is 1.9 percent.

The United States is particularly dependent on property taxes. Local authorities collect his 3% of the country’s gross domestic product each year through these taxes, spending much of it on public school costs.

Land lease financing has worked well for China for a long time. But a slow-motion crash in the housing market has caused dozens of developers to default on their bonds. They are struggling to complete their apartment project, much less buy land for their new project.

Proceeds from land sales over the last few decades have allowed China to keep other taxes low. Although China calls itself a socialist country, there are virtually no taxes on investment profits, inheritance and personal property. National and local governments rely on a regressive mix of heavy sales, payroll and business taxes on top of land leases to developers.

Public resistance to the property tax is strong. Apartment owners believe property taxes should be the developer’s responsibility. Developers are already paying the government a lot of money for land to build homes on.

“A common complaint is, ‘We’ve already paid too much for an apartment, so there’s no way to pay property taxes,'” said Shitong Qiao, a law professor at Duke University.

To make matters worse, local officials in charge of formulating real estate taxes have much to lose. A perk of a civil service job, especially in his 1990s, was the chance to buy an apartment for little or nothing.

Some apartments in big cities sell for millions of dollars, and high-ranking local government officials only earn $30,000 or $40,000 a year, so a 1% annual tax could cost them all their income. may be charged. Taxes can also expose the wealth of officials who speculate on land.

The introduction of property taxes could push home prices down during periods of low construction in all but the largest cities. Many homeowners are already worried about losing money on their apartment.

“In small cities, there is a growing need for property taxes to cover the fiscal deficit, but the housing market is also not as strong as in big cities,” said Zhu Ning, a professor at the Shanghai Institute of Advanced Finance.

The central government last year considered whether to introduce an “apartment tax” on China’s largest and most luxurious apartments and houses, two people familiar with China’s economic policymaking said on condition of anonymity.

But the mansion tax is not moving forward because it could undermine the already fragile confidence in the housing market, the officials said.

A long-term option suggested by overseas experts like Professor Qiao is to require apartment owners to start paying taxes when the building’s original land lease expires.

After Mao Zedong’s death, some early land leases expired after only 20 years.

But modern residential land leases are 70 years. Waiting decades to tax many apartments will not help China deal with its current financial crisis.

Jia Kang, a former finance ministry chief researcher who still advises the ministry, said the completion of the real estate registration system meant China was on track to eventually enact a real estate tax. .

“Unified registration of real estate is the most basic prerequisite for optimizing the management of the real estate market,” he said. “It also plays a role in supporting future property taxes.”

Re-U Contributed to research.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button