Homing in on Property Tax
The last five years had seen the release of various policies for regulating the supply and demand of the real estate sector, and the implementation of the property tax reform could plug a hole in the regulation of ownerships, said Zhao Bo, Associate Professor of the NSD, at the National Development Forum.
China’s real estate market had been booming since the launch of the housing reform in 1998. A study in 2018 found that the per capita living space reached 46 square meters and property ownership stood at 83%, both higher than in the Western countries. Statistics of the Chinese Academy of Social Sciences showed that in 2019 China’s total housing value was 2.3 times the national GDP.
With the rapid development came some significant problems, said Prof. Zhao. While investments and loans were poured into the sector, the real economy suffered under-investment and the wealth gap widened between property owners and renters.
In October 2021, the National People’s Congress passed a draft resolution on pilot reforms of property tax for a five-year span, for which The Ministry of Finance offered interpretations focusing on strengthening supply side management and stabilizing market expectations.
Prof. Zhao pointed out that the purpose of the property tax was mainly to generate revenues for the government to improve public services and the quality of public goods, thereby ameliorating living quality and facilitating a benign cycle.
No detailed rules had been announced for the levy of the housing tax yet. Prof. Zhao compared two possible approaches, one featuring a broad tax base and a uniform tax rate and the other centered on a narrow tax base and progressive tax rates. The former, if set at 0.6% tax rate, could generate a yearly tax income equal to 1.4% of national GDP based on 2019 housing prices. At that scale, the tax revenue would be comparable to that of the consumption tax or personal income tax, but far lower than land-sale revenues. Its major disadvantage, according to Prof. Zhao, would be a disregard for disparities in household incomes and the wealth spread across the country and thus unable to facilitate effective wealth redistribution.
The second approach would factor in a household’s property value, the number of apartments and houses in its ownership, and average housing space per family member. Prof. Zhao and his team found that if those with a property value of three million yuan were to be taxed – such households accounted for 4.5% of the national total, their aggregate property holdings would amount to 31.9% of all housing assets in the country. A levy based on other metrics, such as households with three apartments and above, or those with average living space of 60 square meters per family member, would give significantly smaller tax base.
As the revenues from property tax were strongly and positively correlated to the ratio between housing prices and household incomes, Prof. Zhao said that the levy, once imposed, would have constraining effect on the liquidity and disposable income of some families, especially low-income ones and the elderly. Another issue that deserved consideration was whether the revenues should be kept locally or go to the Central Government for further allocations.
As of the property tax’s impact on the macro-economy, Prof. Zhao cited empirical research which showed that it had limited efficacy in regulating housing prices. Its impact on consumption would be largely determined by the final choice of tax regime. Going for the one based on broad tax base and a uniform tax rate would diminish residents’ consumption, while the other approach might reduce wealth and income gaps and push up total consumption. In terms of the property tax’s impact on investment, Prof. Zhao believed that it would add to the cost of speculative property purchases and stabilize housing prices, thereby causing a decline in real estate investment and shifting investments to the real economy.