China's Property Tax Trial Expansion？
To tighten its grip on the property market, China’s central government announced several price-control measures recently, including 20% tax on the profit from selling a house and promoting the property-tax pilot project. As a result, house buyers and sellers all over the country hurried to tie up deals before the former tax came into effect. However, the tax of 20% on profits from house sales is only involved with the transition process, the property tax trials are involved with all property stocks, thus causing greater fluctuation. If property tax comes into force, what changes will China’s real property market see in the next few years? This may be the problem strongly drawing the attention for the public.
Currently, the property tax is implemented in two pilot cities, respectively Chongqing and Shanghai. Since the trial operation from January 28, 2011, the effect is not idealistic. First of all, the property tax policy does not play the due role to curb the rising property price. During the past two years, the property price keeps going up; in the second place, from the perspective of the threshold amount for property tax levy, it hardly warrants mentioning: there were 30,000 personal houses to be collected with the property tax in Shanghai in 2012 and the collected tax amount reached 2.46 billion yuan. Just under such a background, many people think that the heavy property tax will be the best way to curb house price.
To the best of my knowledge, the largest problem related to the property tax does not lie in the failure to curb the rising property price but in the lack of the tax fairness principle. The interim regulation of Shanghai Municipality specifies that the tax targets are the second property or more than two properties newly purchased by a certain resident as from the date for the implementation of this regulation. Though it is aimed at dampening the property speculation, yet the ultimate cost is unfair: a person owning 20 houses does not need to pay the property tax, but another person who wants better housing purchases a larger house with150 sq.m are forced to pay the property tax?
Of course, many people think that a certain proportion of tax exemption can be preferentially granted to each household. Take Shanghai for instance, where the average household residential area less than 60 sq. m will be exempted from the property tax. It seems to me that it is irrational as the property price varies from case to case. A house for three family members sharing a total area up to 200 sq. m and the total value up to 2 million yuan will be levied with the property tax, but another house with a total area up to 130 sq. m and the total value up to 5 million yuan will not be levied. Obviously, it’s not fair.
Then how to levy the property tax? The best method is that all properties should be equally levied with the property tax with no distinction between the first house or the second house, nor should it be levied according to the tax threshold based on the family average residential area. This practice may come under the question: why should we, the non-property speculators, should be responsible for such a consequence? Therefore, what needs to be further clarified is that in those countries where the property tax is put into trial operation, the property tax has never been used as an edge tool to curb the property price but as the fiscal sources of the local governments as the majority of the expenses for the local education and social security depends on the property tax income.
In China, here is the very significance for property tax. Once the property tax is indistinguishably levied, the unmatched fiscal power and municipal management power of the local governments as from the tax-sharing reform in the 1990s will be totally changed. If the land transfer fees are the incremental income, the property tax income will be the stock-based income. Once local governments have the stable tax sources like the property tax, its desire to sell land will be reduced, and at the same time, it may contribute to the mitigation of the conflict between the local government and the farmers in the land primary market, rendering the land owners with the possible more land returns.
In the current tax collection system, the property owners are only required to pay tax in the transaction period. Once he pays the house proceeds to the real estate developer or the seller, he can enjoy the majority of the appreciated value of the house in the future. However, when an area enjoys the fast rise of the property price, it is not the efforts made by the property owners but the outcome arising from the social development and the enhancement of the public service quality. If the property owners don’t pay any property tax, it means that the benefits brought by all public products will be totally privatized. After the implementation of the property tax, it will be changed. After the property price goes up, the property owners may return some of the benefits to the society in the form of the property tax; after the drop of the property price, the property tax income will drop accordingly, thus genuinely demonstrating the mutual sharing of the community benefits.
Although I place high hopes on the property tax, yet due to the huge tax amount each year, it is closely connected with the immediate interests of the property owners and it is necessary to fully solicit the public opinions so that we can not use this tax as a makeshift to suppress the property price, and it is also necessary to guard against the new unfair operations caused by some special interest groups for the purpose of fairness. Moreover, it’s better to increase no tax under the current overall higher social tax burden.
Originally published on Southern Metropolitan Daily | 2013-3-8
