Not on my roost

Chinese officials dig in their heels on expanding the property tax

Not on my roost

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Beijing officials snapped back last week at news reports that the capital was in the midst of pushing through a housing tax.  

Via official Sina Weibo accounts, cadres in the Department of Land Tax and the Department of Housing and Urban Development, among other government bodies, denied reports that such a tax was awaiting State Council approval. The original report from China Times said Beijing planned to impose a tax on houses with more than 24 meters of space per resident during the first half of the year.

The lightening-quick response to the rumor demonstrated the sensitivity surrounding a potential housing tax. Beijingers in particular have expressed distaste with paying a tax on apartments they've held for years and yet still don't technically own (residential land in China is owned by the government and simply leased to “buyers” for 70 years).  

Officials have little to gain from imposing a property tax in Beijing and are therefore dragging their feet. The capital was marked as the next spot for an expansion of a property tax experiment. However, Beijing officials said on Weibo that they “have received no notice from superiors” on the tax. “[W]hich bureaucrat wants to commit career suicide by forcing all the officials from around China who own property in Beijing [to start paying tax on their housing]?” China commentator Bill Bishop asked in a blog last week.

Results in Shanghai and Chongqing, which launched the tax in early 2011, have also been unimpressive. Revenues from the first year were far lower than total government fees on home sales (the tax department has yet to release figures for the second year).

For now, local government officials in China seem satisfied with the revenues taken in from land transfers, perhaps because much of it goes into their own pockets. Many land-transfer fees from auctions or mortgage loans are “extra-budgetary,” which allows for a higher degree of corruption, according to a study led by the World Bank.  Overcoming inertia

Given all this resistance, the central government will need to do more to make sure property tax is adopted nationwide by 2015, a date designated in the country's 12th Five-Year Plan.  

Implementing a property tax in China remains an essential measure, for several reasons. China’s debt-laden local governments are still dependent on transaction fees, which by some accounts constitute 25% of their revenues. By giving governments another channel to generate funds, the tax will help to prevent the forced evictions and poor compensation for land that drive unrest in China.

“A comprehensive tax reform may help to address many of these challenges, through replacing non-transparent, unreliable and unsustainable fee-based revenue with a transparent and coherent tax,” according to the World Bank report.

The tax will also establish a framework for stable regulation of the market. During the last six years, the government has issued policies to alternately dampen and stimulate housing demand in order to keep the market from overheating or crashing to a halt. But these policy controls have also distorted incentives and resulted in lower economic benefits. A fixed annual tax rate will send clearer signals for future market conditions to property developers and potential home buyers.

Some analysts predict a 5-10% increase in housing prices in major cities in 2013, and officials in China's four largest cities have hinted they will strengthen policy controls. That would be a mistake.

Officials should resist the temptation of an easy, short-term fix, and instead focus on the harder measures. A property tax will not produce instant results, but it will lay the foundation for longer-term revenues and market stability. That will enrich local governments far more in the long run.