Nationwide property tax for China

Nationwide property tax for China

Saturday, Nov 23, 2013

Grace Ng

The Straits Times

To achieve its twin priorities of urbanisation and reducing social unrest, the top Chinese leadership has for the first time endorsed a nationwide property tax in a key policy document. Beijing has pledged to “accelerate legislation on the property tax”, among a host of other fiscal reforms described by analysts like government think-tank researcher Gao Peiyong as “critically important” to the next phase of China’s development.In a statement last Friday, after the Third Plenum of the Communist Party’s Central Committee that charted China’s growth path for the next decade, Beijing laid out a package of fiscal reforms to tackle problems such as a yawning rich-poor gap and social discontent sparked by unsavoury tax practices of debt-laden local governments.

These pledges include raising the direct tax burden on the rich, raising consumption taxes on luxury goods and improving local governments’ fiscal transparency. One item that stands out is the identification of property tax legislation as a priority.

“This is welcome news,” said Guangdong-based property research consultant Zhao Zuowen.

“There was speculation before the plenum about whether resistance from vested interests could keep the tax out of the document, but now there is no doubt about Beijing’s resolve,” he observed.

Government think-tank researcher Yuan Gangming said setting up proper rules and procedures, including a national registry for house ownership, is a key step to speed up the expansion of the long-anticipated levy.

Property taxation has stalled at the pilot stage in two cities, Shanghai and Chongqing, amid delays in rolling out a registry.

Besides controlling housing bubbles, analysts hope the tax – if implemented fully – can offer local governments a much-needed recurring source of income, in line with international practice.

“A national property tax has proven to be a secure and stable revenue source for local governments in countries like the United States,” said Moody’s Investor Service senior credit officer Debra Roane. This could help to put local governments “on a more solid financial footing”.

Currently, a key source of revenue for local governments is one-off land sales. This has incentivised local officials to grab land from farmers, reportedly sparking thousands of demonstrations and other “mass incidents” a year.

Beijing has also indicated it will allow local governments to impose resource taxes and issue bonds on their infrastructure projects.

Right now, apart from land sales, local governments raise funds through bank borrowings and special financing vehicles that tap the shadow banking sector.

“Property tax and bonds on infrastructure projects are all aimed at diversifying their revenue base as their funding costs will escalate with urbanisation,” said Mr Gao.

By doing so, the hope is that local governments have a more sustainable income stream and are better placed to fund the building of urban infrastructure and social welfare projects to accommodate the movement of some 100 million rural residents to cities by 2030, as part of Premier Li Keqiang’s urbanisation drive.

Also, with reform pledges to give farmers rights to sell or transfer their farmland and get a fairer compensation in return, China wants to increase their spending power so as to boost domestic consumption and fuel economic restructuring efforts.

Fiscal tools are an important way to support these goals. To redistribute incomes from the rich to the poor, Beijing aims to slap higher tax rates on the income of the wealthy and their consumption of luxury goods.

The tax reforms will remedy the current situation where the middle class is forced to cough up proportionately more tax, sapping their spending power, said State Information Centre researcher Niu Li.

He cautioned that adjusting individual income taxes and implementing the property tax will be a lengthy process.

“Patience is needed, this is not a matter of one or two years. It will take time,” he told The Straits Times.