Shanghai, Chongqing to Pilot Property Tax

Though it's widely argued a premature adoption of property tax would be unfair to tax payers, it is still believed to be the most effective way to curb China's skyrocketing housing prices and is therefore likely to be adopted.

On April 7 and 8, as the rumor that the Ministry of Housing and Urban-Rural Development was launching a pilot property tax in some cities spread, the stock price of real estate enterprises fell sharply.

According to media reports that followed, Shanghai was considering imposing a "property-owner tax" (房产保有税）on both existing homes and newly-constructed homes. Home-buyers will be divided into ordinary buyers and investors, according to the locations and number of properties they own. People who buy homes for their personal use will be exempt from paying a "property-owner tax".

On April 8, the Shanghai Housing Bureau responded to the above rumor saying, "it's not unusual for related departments to research the implementation of property tax, but the central government will make the final decision."

A source told an EO reporter, earlier this year major policy-makers in Shanghai stated in a closed-door meeting that they were determined to launch a property tax this year and the Housing Bureau had been assigned to design the project.

However, according to an official serving a provincial financial department, "housing bureaus may only collect local housing market information for the purpose of providing a reference to high-level authorities or finance departments." He said, local governments need to get approval from the central government before issuing a property tax.

In contrast to Shanghai's  government, Huang Qifan, Mayor of Chongqing Municipality, claimed during this year's CPPCC and NPC that Chongqing will require home-buyers to pay a "special real estate sales tax"(特别房产消费税）so as to slow the bubbling property market. However, the local taxation bureau has continued responding "it's unclear" and "no comment" every time they are asked about whether Chongqing will pilot the launch of a property tax.

Trial Variants

Since 2003, the central government has allowed Beijing, Liaoning, Jiangsu, Shenzhen, Ningxia and Chongqing to take part in a "mock payment" of a property tax, by following the procedures of making a real payment; real estate, finance, and land administration authorities jointly compile property transaction figures and assess and compute tax revenue. In 2007, Anhui, Henan, Fujian and Tianjin were added into the list.

However, the mock payment of property tax did not achieve its desired results.

A Jiangsu official said many cities were unwilling to take part in the above experiment because, "it is contrary to tax-reducing policies which will promote the local economy and it lays more of a burden on taxpayers." Local governments are worried that this new tax item will play a negative role in attracting investment.

The mock payment in other provinces, including Ningxia and Henan, has had practically the same outcome.

In spite of these unsuccessful trials, the central government remains determined to introduce a property tax. At the beginning of this year, the State Administration of Taxation (SAT) claimed it would conduct a real estate tax  (房产税）assessment across the country. The Ministry of Finance has also expressed that one of its main tasks this year is to improve the real estate taxation system.

The "real estate tax"(房产税）has become the new focus of the central government's policy, replacing  the "property tax"(物业税).

To some degree, real estate tax and property tax both impose a tax on property-owners. The difference is the former covers more ground. Currently, there are two kinds of tax imposed on property-owners: real estate tax and a tax on land use in cities and towns.

To implement a new tax item such as a property tax, approval from the National People's Congress, which is a long process, is needed. Conversely, to revise real estate tax regulations only requires State Council approval. "In order to levy a real estate tax on individuals, the exemption of personal tax payers must be eliminated by the government," stated Yang Hongxu, director of the Comprehensive Research Department of the E-House China R&D Institute, when explaining what actions could help the government get rid of the legislative obstacles to launching the provisional property tax.

Yang said, the "property-owner tax" in Shanghai and the "special property sales tax" in Chongqing were both expansions of the real estate tax.

Bai Hongwei, a high-profile analyst with the China International Capital Corporation, said the central government was optimistic about the outcome of  local governments applying to implement property tax. "The stagnation of property tax over the past several years is mainly attributed to local governments who have no incentive to implement it."

Jia Kang, director of the Financial Science Research Institute of the Ministry of Finance, pointed out in an article that imposing property tax would increase the market demand for small and medium size housing, promote real estate investment, reduce speculative behavior on property, reduce the housing vacancy rate and give life to the housing rental market.

Reducing the vacancy rate of houses in Chinese cities is possibly the most direct result that levying property tax will have. Statistics from State Grid show, the reading for 65.4 million houses in 660 cities has been 0 ammeters for over 6 months, indicating an unreasonably high vacancy rate of Chinese homes.

Winners and Losers

Property tax will provide more tax income for local governments, but for those pilot cities, it might have negative outcomes because citizens may feel that they're being unfairly taxed.

"The simple fact of the matter is, why would I buy property in Shanghai and pay a tax on my purchase when other cities have no such requirement?" an official with a provincial finance department said.

Yin Kunhua, a professor at the Shanghai University of Finance and Economics and dean of the Shanghai Weston Real Estate School of Management, argued that if the property tax was introduced now, not only would it have difficulty curbing housing prices but it would also increase pressure on the real estate industry.

Yang Hongxu said, as a local tax item, the property-owner tax was intended to curb speculative behavior in the property market of big cities. As a political measure, it's closely connected to local economic levels and should not be deterred by scruples regarding fairness.

"The positives that will come out of the launch of the pilot program will outweigh the negatives," he said. While the burden of existing tax items imposed on properties, historically speaking, were all previously transferred to home-buyers, the property tax, as a tax imposed on the process of owning property, will play a more effective role in curbing speculation.

Some insiders believe the new tax item may also effect the role of land in China's existing financial system; changing the current administrative fee into a tax might influence the revenue that local government's raise by selling land-use rights.

However, according to the current situation, the property tax will only increase the cost of maintaining property, and will not be able to promote the reform of local government financing. Financial professionals, including Jia Kang, would prefer to have property tax coexist with land sales as local government revenue sources.

Additionally, in the eyes of some senior members of the industry, the introduction of a property tax should have three technological foundations: A detailed real estate registration database, a group of real-estate appraisers, and a government department capable of managing the new tax. However, "currently, with a weak evaluation system and a serious shortage of qualified employees, none of these three requirements can be met."

"Only when the real estate market is mature, with a more complete system, can the property tax have a positive effect on the marketplace," Yin Kunhua said.