Across China, many local governments are on the brink of bankruptcy. Some cities have cut the salaries of their civil servants. Cuts in municipal health insurance have sparked street protests.
Central government bailouts are one way to bail cities out of their deep fiscal woes, but China hasn’t turned to a source of revenue that would be an obvious option in other countries: property taxes.
In China, where the government owns land, local governments almost never collect taxes from homeowners to support services like schools. Cities instead rely on selling long-term leases to real estate developers. Income from these land sales has fallen sharply over the past year.
Last month, China’s central government said it finally figured out who owns 790 million homes and other properties after decades of efforts involving 100,000 workers. This knowledge means officials in Beijing could introduce a nationwide property tax system. However, don’t expect them to do so anytime soon. Obstacles range from technical (it would be complicated), to economic (it would hurt homeowners at a tricky time for the real estate market), to political (it would expose government officials who own a lot of homes).
The idea of introducing a property tax is not new. The Central Committee of the Communist Party, in many respects China’s highest decision-making body, decided in 2003: “When circumstances permit, a unified and standardized property tax will be levied on real estate.”
Many economists advocate a real estate tax, notably Lou Jiwei, a retired finance minister who remains an intellectual leader among China’s technocrats. “A real estate tax is the most appropriate type of tax as a local tax and should be introduced 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 lands from the 1940s to the 1960s, confiscating them from wealthy families – who were killed in large numbers – and transferring ownership to the state. Since the 1980s, local governments have covered much of their cost of road construction, running schools and other activities by leasing large tracts of land to property developers.
Until last year, land lease sales accounted for 7 percent of China’s economy. In comparison, the average real estate tax in the 38 industrialized democracies of the Organization for Economic Co-operation and Development is 1.9 percent.
The United States is particularly reliant on property taxes. Local governments take in 3 percent of the country’s gross domestic product each year through these taxes, and spend much of that funding public schools.
Raising money through land leases has worked well for China for a long time. But a slow housing market slump has left dozens of developers defaulting on their bonds, struggling to complete their housing projects, let alone buy land for new ones.
Revenues from land sales over the past few decades have allowed China to keep other taxes low. Although China describes itself as a socialist country, there are virtually no taxes on capital gains, inheritance or personal wealth. National and local governments rely on a regressive combination of high sales taxes, payroll taxes and business taxes in addition to land leases to developers.
What’s stopping China from levying a property tax?
Public opposition to a property tax is strong. Apartment owners believe that property tax should be the responsibility of developers who have already paid the government plenty of money for the land to build housing on.
“The common complaint is, ‘We’ve already paid so much for an apartment, there’s no way we’re going to pay another property tax,'” said Shitong Qiao, a law professor at Duke University.
Another difficulty is that the local officials responsible for drafting a real estate tax have much to lose by doing so. Especially in the 1990s, one advantage of civil service jobs was the ability to buy housing for little or nothing.
Since some apartments in big cities sell for millions of dollars, and high-ranking city officials earn only $30,000 to $40,000 a year, imposing a 1 percent annual tax could claim all of their income. A tax could also reveal the wealth of officials speculating in real estate.
The introduction of a property tax could lower house prices at a time when construction activity is weak in all but the largest cities. Many homeowners are already afraid of losing money on their home.
“The smaller cities have greater property tax needs to cover their budget deficits, but their housing markets are also not as strong as in the big cities,” said Zhu Ning, a professor at the Shanghai Advanced Institute of Finance.
What could China do to start taxing real estate?
Last year the central government considered whether to introduce a “mansion tax” on China’s biggest and fanciest apartments and houses, said two people familiar with China’s economic policies, who insisted on anonymity because they weren’t authorized to discuss the issue publicly argue.
However, both people said a real estate tax was not introduced over fears it could damage already weak confidence in the real estate market.
One long-term option suggested by foreign experts like Professor Qiao is to require apartment owners to pay taxes when the original leases for their buildings expire.
Some early land leases after Mao’s death lasted only 20 years and have expired.
But the last leases for residential properties have been in place for 70 years. Decades of waiting for many homes to be taxed would 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 property registration system means China is still making progress in introducing a property tax.
“The unified registration of real estate is the most fundamental condition for optimizing the management of the real estate market,” he said. “It will also play a role in supporting a future real estate tax.”
Li You contributed to the research.