Is It Time for China to Embrace A Property Tax?

This piece, first published on May 13, 2015, is being republished as part of the Chicago Policy Review‘s 20th Anniversary Series. Please visit us here to learn more about the series from our Executive Editors.

Property tax is favored by many local governments in developed countries for its stability as a major revenue source. However, it has only been since the beginning of the 21^st century that active discussion about the introduction of property tax has taken place in China. In 2011, Shanghai and Chongqing launched the first pilot programs attempting to impose property tax at the local level. Since then, to the chagrin of the central government, the level of response from local government has been waning. Similar programs in several provinces have been proposed but are left in the preparation phase. The uncertain effects of property tax on the local economy has prevented local government from taking an active role, impeding the implementation of property tax on a larger scale.

In “Introducing Property Tax in China as an Alternative Financing Source,” Sun Chan Cho and Phillip Pil Soo Choi address this problem by examining the background and rationale for introducing the property tax. They offer a mathematical model to prove that whenever the land has been fully developed, or there is not enough land in reserve, a property tax yields more profit for local government than a lump sum grants fee. In addition, the tax rate should be high enough to substitute for the existing income from lump sum fees.

China’s tax system reform of 1994 fundamentally changed the tax revenue sharing structure between local and central government. To compensate for lost revenue and sustain its own growth, local government soon found out a fast-and-easy way to generate revenue—by giving land use rights to users for lump sum fee, officially called “land granting.” Today, 70 percent of all land is distributed by granting, and granting fees represent the main source of out-of-budget revenue of local governments.

However, Dr. Cho and Dr. Choi argue the current land management system is unsustainable for three reasons. First, not much rural land is left for future requisition. The total agricultural land area in China is roughly 121.7 million hectares, which is in line with the government’s preservation commitment of 121.2 million hectares. Second, relatively developed regions do not have enough available open land reserved for future use. The low levels of grant revenue in major cities suggest that open urban space is already at a premium. Third, distorted profit distribution among land market players causes multiple problems like dislocation of rural dwellers, short-sighted behavior of local governments, excessive profits for urban developers, and an inordinate burden on urban dwellers due to high housing costs.

Collecting property tax can create an alternative financial lifeline while also slowing the rise of housing prices and mitigating income inequality. Dr. Zaifu Tang from the Chinese Academy of Social Science has shown that local government will benefit from its visibility and reliability. Property tax can form a continuous feedback cycle of investment and income. Furthermore, it places an appropriate burden on property owners that benefit from infrastructure and other public services, which suppresses unreasonable speculation and narrows the gap between the rich and poor.

To further test the efficacy of property tax, the researchers employ a theoretical model to assess the economic return for two land management systems with different tax ratios. The model shows that using a property tax yields more profit than a lump sum grants fee whenever the land has been fully developed or there is not enough land in reserve. They argue that the tax rate should be high enough and other land-related taxes abolished in order to meet existing revenue targets and avoid double taxation.

Although they confirmed the advantages of property tax over land granting, the implementation of theory yields to the political and economic climate in China. The current macroeconomic environment and issues surrounding rule of law in China make an imminent implementation unlikely. In 2014, housing prices declined in 68 of 70 major cities, raising concern about the possibility of a housing market collapse in 2015. The government’s immediate concern lies in stabilizing housing prices and avoiding public panic. Additionally, some speculate that property tax might encourage divorce as a means of tax avoidance. According to Agence des Feuilles Politiques, the Shanghai Civil Affairs Bureau confirmed the planned tax had coincided with a divorce boom. Due to these concerns, the chances that the Chinese government will adopt a nation-wide property tax are slim, at least in the short run.

Article source: Cho, SungChan, and Philip PilSoo Choi. “Introducing Property Tax in China As an Alternative Financing Source.” Land Use Policy, 2014.

Featured photo: cc/(Jens Schott Knudsen)