Across China, many local governments are on the brink of bankruptcy. Salaries for civil servants have been cut in some cities. A cut in local government health insurance has sparked street protests.
A central government bailout could save cities from deep financial troubles, but China is ignoring the obvious alternative in other countries: property taxes.
In China, where the government owns land, local governments rarely tax homeowners to support services such as schools. Cities are instead resorting to selling long-term leases to property developers. Revenue from those land sales has plummeted over the past year.
China’s central government last month said it finally knew who owns 790 million apartments and other properties after a decade-long effort involving 100,000 workers. This knowledge means Beijing authorities can initiate a nationwide property tax system. But they are not expected to do so anytime soon. Obstacles range from technical (complex) to economic (will hit homeowners at a sensitive time in the housing market) to political (government officials who own many homes). will be exposed).
The idea of introducing a property tax is not new. In many ways China’s supreme decision-making body, the Communist Party Central Committee, resolved in 2003 to “impose a unified and standardized property tax on real estate, when conditions permit.”
Many economists support a property tax, especially Lu Ziwei, a former finance minister and intellectual leader of China’s technocrats. “Property taxes are 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 communist China, Mao Zedong, nationalized China’s land from the 1940s to the 1960s, confiscating land from wealthy families 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 plots of their land to developers.
Until last year, leasehold sales accounted for 7% of China’s economy. By comparison, the property tax averages for the 38 advanced democracies belonging to the Organization for Economic Co-operation and Development are: 1.9 percent.
The United States is particularly dependent on property taxes. Local governments collect his 3% of gross domestic product each year through these taxes, spending much of it on public school fees.
Raising finance through leaseholds has worked well for China for a long time. But the gradual crash in the housing market has left dozens of developers defaulting on their bonds and struggling to complete apartment construction, let alone buy land for new construction.
Proceeds from land sales over the past 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 combination of heavy sales, payroll and business taxes in addition to renting land to developers.
Why is China not imposing a property tax?
Public resistance to the property tax is strong. Apartment owners believe property taxes should be borne by developers who have already paid the government large amounts of land to build their homes.
“A common complaint is, ‘We’ve already paid so much for an apartment, why can’t we pay the property tax,'” said Shitong Qiao, a law professor at Duke University.
To make matters worse, local government officials responsible for formulating real estate taxes have much to lose from real estate taxes. A perk of his civil service job, especially in his 1990s, was the opportunity to buy an apartment for little or nothing.
Some apartments in big cities sell for millions of dollars, and local government executives earn only $30,000 or $40,000 a year, so imposing a 1% annual tax would hurt their income. may charge the full amount of Taxes can also expose the wealth of officials who speculated on land.
With construction slowing in all but the largest cities, the introduction of a property tax could push home prices down. Many homeowners are already worried about losses in their apartments.
“Small cities have a greater need for property taxes to cover the fiscal deficit, but the housing market is not as strong as in big cities,” said Zhu Ning, a professor at the Shanghai Institute of Advanced Finance.
What can China do to start a property tax?
Two people familiar with China’s economic policy-making, who requested anonymity because they are not authorized to discuss the matter publicly, said last year the central government imposed an “apartment tax” on China’s largest and most luxurious apartments and homes. He said he considered whether to introduce
But the introduction of a condominium tax has been slowed because it could undermine confidence in an already fragile housing market, two people said.
A long-term option proposed by foreign experts like Professor Chao 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, which were as short as 20 years, have already expired.
However, recent residential land leases are for 70 years. Waiting decades to tax many apartments will not help China deal with its current financial crisis.
Jia Kang, a former finance ministry research director who still advises the ministry, said the completion of the real estate registration system still means China is on track to one day enact a real estate tax.
“Uniform registration of real estate is the most basic prerequisite for optimizing the management of the real estate market,” he said. “It will also play a role in supporting future property taxes.”
Lee Yu Contributed to research.
