By Du Tao (杜濤)
Issue 611, Mar 18, 2013
News, page 5
Translated by Zhu Na
Original article: [Chinese]

During the annual meeting of China's parliament this month, property taxes were a major topic of discussion. 

After two years of being piloted in Chongqing and Shanghai, why haven’t property taxes expanded any further? Do they really represent the future of real estate regulation? And will they ever play a major role in local taxation systems?

The Economic Observer asked these questions to Sun Gang (孫鋼), a tax policy researcher at the Ministry of Finance’s Research Institute for Fiscal Science, Yang Zhiyong (楊志勇), director of the finance research office of the Institute of Finance and Trade Economics at the Chinese Academy of Social Sciences, and Li Hua (李華), director of the finance department at the Shandong University School of Economics.

Economic Observer: The property tax has encountered some problems expanding. How should we promote it in the future and make it palatable to the public under current conditions?

Sun Gang: Based on Shanghai and Chongqing’s pilots, the resistance to property taxes will be very big. For a long time property taxes have had little development because the department issuing them wasn’t sure about how to increase the number of pilot cities.

The question isn’t whether property taxes should be imposed or not, but who they should be imposed on, how they should be imposed and how much should be taxed. For local governments, there are issues like whether the piloting work will be done well and whether tax revenue will increase or not. Many local governments are unwilling to pilot property taxes, so it’s very important to improve the approach.

No matter how the property tax is imposed, the principle of fairness must be insisted upon. 

Yang Zhiyong: Personally, I think the government needn’t always focus on property taxes. The problem of real estate regulation isn’t something property taxes can solve.

We have to be cautious about the problems that could be caused by an individual housing property tax. Even if society agrees to impose the tax, local governments still need to think it over. If taxpayers ask the government where the money goes, are the local governments able to give a satisfactory answer?

Li Hua: China’s property tax has encountered some difficulties and there are many reasons for that. There are problems brought by China’s land system, historical reasons and issues with the investment structure. People also don’t have a strong awareness of paying property taxes.

The government should make clear some guiding issues including the purpose of imposing property taxes. Based on this, it should design a property tax collection program in a scientific way, provide support measures and widely publicize them.

The public should also be informed about what the new tax revenue will be used for in order to reduce risk in tax collection.

The EO:  After the past two years of piloting, some people are still very opposed to property taxes. Why is this?

Sun Gang: Property taxes have always existed. Residential housing was merely exempted from it before. The key is how to implement the property tax. There are three things that need to be clear: First, property taxes have always existed. Secondly, countries all over the world impose property taxes. And thirdly, it is a source of tax revenue for local governments.

Property taxes involve many things. If we assume it only taxes those who own many properties or have high-end property, then the public won’t oppose it. But the pilots in Shanghai only tax new properties and not existing properties, which isn’t reasonable. We need to think about how to design tax rates and taxation methods.

Yang Zhiyong: Many countries collect individual housing property taxes, but this shouldn’t be the reason that China imposes them. We learned from Hong Kong to lease government-owned land. The result was that land prices pushed housing prices up. For the individual housing property tax, if we learn from Hong Kong again, residents won’t be able to bear the heavy burden. This is because Hong Kong’s land price is high and the housing price is high, but the property tax is light. If we want to learn from them, we should learn systematically. If we only learn part of the system, it will increase people’s burden.

Li Hua: Property taxes are a major source of income for local governments in many countries internationally and they can also affect housing prices. We should see that, in principle, property should be taxed, but it cannot be rushed to go full scale. The technical aspects need to be deeply discussed.  

Meanwhile, we should be clear about the purpose of imposing property taxes. In the short term, we cannot set property taxes as the major source of local fiscal revenue or expect them to be good medicine for regulating the real estate market. Don’t let property taxes take on too many functions, but just let them become an important part of improving the taxation system. Of course, in the future property taxes will become an important source of local fiscal revenue, but this is long-term tax system construction.

The EO: Looking at the pilots of the past two years, can property taxes restrain high housing prices?

Sun Gang: Property taxes’ impact on housing prices can’t be talked about in general terms. We must wait for the specific plan to come out, then talk about it. From 2003 until now, China’s housing price has always gone up. The last government tried to control the housing price through taxation policy, but it seems the effect hasn’t been ideal. 

The taxation policies that have been launched were all imposed on sellers, but actually it was paid by buyers. The result was that the more the government regulated, the higher the housing price went. Under the current conditions of housing supply, direct taxation like property taxes will not play much of role in controlling housing prices.

Yang Zhiyong: We can’t expect property taxes to regulate housing prices. Before the financial crisis, most developed counties had property taxes, but their housing prices still increased. If the issue of commercial housing supply can’t be solved fundamentally, then property taxes can only increase the burden of property buyers.

Many countries don’t have state-owned land, which requires transfer fees for the rights to use it. So why does China have it? It is our land system that made it happen. Some people suggest canceling land transfer fees or say property taxes can only be promoted on the basis of removing land transfer fees, which isn’t right. Land transfer fees solve the problem of who will be allocated land resources. If there are no land transfer fees, everyone would want to have the land in downtown areas. This is why transfer fees cannot be canceled.

But if we have to design an individual housing property tax system under such a land system, then China’s property tax burden should be lower than those countries that have private land ownership. If the latter’s tax rate is 1 percent, then the former’s should be 0.5 percent or lower.

Li Hua: Since we set the real estate industry to be market-orientated, then fundamentally its price should be decided by supply and demand. Taxation can impact price to a certain degree, but it’s unrealistic to fully depend on it to control housing prices.