expected to expand those of a decade before, the new pilots are unlikely, given current ‘stability’ and ‘baseline’ imperatives, to make radical changes
‘Common prosperity’ has cast renewed light on tax reform, above all for property. Deemed crucial for ending the economy’s dependence on rising property values, easing local government fiscal woes and averting a national hard landing, real estate tax offers a sustainable path to funding local public goods.
A week after Xi Jinping mentioned it in October, the NPC (National People’s Congress) authorised new pilots for the long-discussed real estate tax that was languishing in the too-hard basket—a classic case of the ‘game of interests’ driving policy paralysis. Pilot reforms launched in Shanghai and Chongqing in 2011 have largely been seen as failures.
Light on detail, the NPC’s ‘Notice’ stipulates only that the new pilots will run for five years, and that both residential and non-residential properties (excluding legally-owned rural homesteads) will be taxed. Some clues emerge from reviewing previous pilots and their ‘failures’. Yet effective rollout requires an appetite for risk at the highest level, not least while Xi is seeking to retain the leadership for a third term which will demand stability on all fronts.
Shanghai and Chongqing a decade on
Rolled out in 2011, the Shanghai and Chongqing pilots differed in several ways, most notably by targeting different housing categories.
The Chongqing pilot, part of the ‘Chongqing common prosperity model’ in the Bo Xilai era, also featured affordable housing construction and support for small businesses.
But taxes, as in other parts of the world, did little to slow the rise of housing prices over the next 10 years. Since 2011, average housing prices in Chongqing and Shanghai have risen some 100 and 150 percent respectively. Fiscal returns also disappointed—a pittance relative to the revenue from land transfers that has been critical to local governments since they lost access to revenue in the tax reforms of 1994. According to Xia Lei 夏磊 Sea Land Securities, real estate tax in Shanghai and Chongqing will in 2020 total only 2.8 and 3.4 percent of fiscal revenues respectively.
Factors behind this limp impact are various. Both are first-tier cities, attracting top talent; housing demand has tracked population growth. The narrow scope of the taxes levied was often called into question. A major housing category went untaxed in Shanghai when it ruled existing homes out of the pilot’s scope. In the Chongqing pilot, the focus on luxury homes set the bar very high.
In addition to technical issues, political and public opinion militated against advancing the tax push in the 2010s. Local governments, addicted to revenue from land transfers (and under-the-table deals between officials and developers) balked at disruptions to their interests.
Land ownership adds another layer to the public’s natural resistance to be taxed further. Given that property ownership in the PRC is leasehold, householders have effective title over their residences for 70 years only. In addition, housing prices already include hefty land revenues paid to the local government when property changes hands. To bring in a recurrent tax without easing the burden of the transfer tax is seen as taxing homebuyers twice.
local fiscal gap persists
The NPC’s notice indicated the new pilots would be broader in scope than the old; the title of the tax changed from fangchan shui (housing duty) to fangdichan shui (real estate tax including land). It is currently unclear how adding the concept of taxing the land would differ from taxing the value of the house that already includes that of the land.
One particular area that is expected to improve on the previous pilots is taxing existing houses. A line has been drawn between taxes based on the use of a factor of production (land transfer fees) and those that fund public goods (real estate tax). This distinction, in theory, avoids double taxation, but moving from theory to practice will be more complicated.
How a real estate tax would break the reliance of localities on land transfers remains a hot topic. The total value of existing housing in 2020, estimates Ren Zeping 任泽平 Soochow Securities, was some C¥400 tn. Levying a high 2 percent tax would yield only some C¥8 tn, roughly equivalent to the total income of state-owned land-use rights transfer funds and state-owned land income funds that is about C¥8.4 tn according to MoF (Ministry of Finance). At a more likely lower rate, the real estate tax will not replace land transfer revenues. With only a finite amount of land to transfer, localities will, in the long run, face a net decline in revenue. Real estate tax, argues Xia Lei, should be deemed a supplement to other tax revenues.
Cities have yet to be designated to run pilots, but some localities stand out for selection. Chongqing and Shanghai make sense: experience and infrastructure are in place that needs only to be expanded rather than created from scratch. Delegates from Shenzhen, Hangzhou, Suzhou and Jinan attended a real estate tax symposium held in May 2021 by MoF and MoHURD (Ministry of Housing and Urban-Rural Development), setting off rumours that they will also host pilots.
Xi wants stability in 2022
The December 2021 Politburo meeting (ahead of the Central Economic Work Conference) signalled stability will be the priority for 2022. Yet Xi’s pivot from economic growth to common prosperity is a step into uncharted territory. Keen to justify overturning the two-term limit, he understandably highlights both an environment of risk and his unique ability to navigate the nation through it. After a tumultuous 2021 for markets, he needs no further unanticipated hiccups.
Demand for stability is thus likely to loom over Beijing in 2022. To ward off vested interests and their real or projected disruptive potential, real estate tax pilots are likely to be watered down.
Xu Shanda 许善达 | SEEC Research Institute expert; former State Tax Administration deputy director
Long time opponent of real estate taxation, Xu notes that states with it differ from the PRC. Many market economies levy it on property, whose owners are liable to pay it. Property in the PRC is not unitary but split: land is owned by the state, the housing etc. built on it by individuals. Taxing property is called into question by this division. Xu hence argues for a ‘consumption tax’ on the sale of high-end residential properties as an alternative to a real estate tax.
A former tax official, Xu worked in SAT (State Tax Administration), ultimately as deputy director 2000–06. Since retirement from government agencies, he has worked across the private sector and academia.
Huang Qifan 黄奇帆 | China Institute for Innovation & Development Strategy executive vice chair; former Chongqing mayor
Mayor of Chongqing between 2010 and 2016, Huang was a proponent of the ‘Chongqing model for common prosperity’ under then Party secretary Bo Xilai 薄熙来. The Chongqing model envisaged high-speed, high-quality development fused with social justice and equality (Xi’s 2021 version omits ‘high-speed’). The real estate tax pilot was not in Huang’s view a panacea for rising housing prices, but one of a suite of policies (including affordable housing) to revamp the state’s role in land supply. His model supported micro-businesses and hukou reform to bridge urban/rural gaps.
A senior policy maestro, Huang survived serving under Bo Xilai and remained in his role after Bo’s downfall and life imprisonment at the hands of Xi Jinping. Completing his term as mayor, Huang was NPC Finance Committee deputy chair until 2018, then academic advisor of the China Finance 40 Forum.
Lin Jiang 林江 | Lingnan College, Sun Yat-sen University Department of Finance and Taxation dean
A property tax levied on property owners, would, in theory, dampen housing prices, argues Lin. Pilots launched in Shanghai and Chongqing in 2010 left prices untouched, he notes. Localities are in a bind: a tax may yield them stable, long-term revenue streams, but if the resulting chill on prices were to spill into the land market, it would risk an immediate liquidity crunch.
Taking a doctorate in industrial economics in 1993 from Sun Yat-sen University (Guangzhou), Lin has since the 1980s worked both in universities and finance departments of SOEs such as China Merchants Group.
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