Since the real estate tax was added to the Chinese government’s 14th Five-Year Development Plan late last year, the real estate tax has once again attracted widespread attention from the public opinion community. Recently, the Ministry of Finance and other major implementation and promotion departments of real estate tax held a symposium on real estate tax reform pilot work in Beijing to listen to opinions on the reform. Does this mean that the legislative process of the real estate tax law, which has been rumored for years, is about to start? Will it bring more benefits or drawbacks to Chinese society?
The news of this meeting was announced by the website of the Ministry of Finance. Participants in this meeting on May 11 included four departments, including the Ministry of Finance, the Budget Work Committee of the Standing Committee of the National People’s Congress, the Ministry of Housing and Urban-Rural Development, and the General Administration of Taxation.
In the past six months, Minister of Finance Liu Kun has publicly mentioned real estate tax three times. Most recently, Liu Kun wrote an article in the Economic Daily, “Establishing a sound modern fiscal and taxation system conducive to high-quality development,” in which he mentioned “promoting real estate tax legislation and reform.
These signs indicate that the real estate tax legislation, which has been stalled for a long time, has entered the climax stage. This does not seem to be a surprise to the outside world.
China’s real estate tax is on the verge of emergence (Photo by Radio Free Asia)
Real estate tax is a boon
“I personally think that a real estate tax will definitely be introduced this year and next year, because it determines the redistribution of wealth in China,” a professional who has been working in the real estate industry in first-tier cities such as Beijing and Shenzhen for many years and who wishes to remain anonymous for security reasons told the station.
Consistent with this optimistic estimate, this gentleman sees many benefits to a real estate tax, “96 percent of urban residents own their personal homes, and such a huge asset in the hands of individual Chinese people would create a very stable tax source.”
Xia Yeliang, a liberal supremacist scholar and former economics professor at Peking University, also believes that a real estate tax should be levied, “There is no reason not to collect it, just like what Franklin said, the only thing that does not change in this world is death and taxes, these two are necessary. But how to use this tax is a different proposition. Tax collection is inevitable.”
China has been proposing a real estate tax for more than a decade. in 2011, Shanghai and Chongqing piloted a property tax on individual homes. But that effort was largely over by the end of 2014, and outside commentators said such pilots were not successful. At the time, it was noted that the State Administration of Taxation had shifted its focus to real estate tax legislation at the national level and made it an important part of future tax reform.
Fu Isaac, who has been engaged in the financial industry in Shenzhen for many years, believes that the property tax pilot was stopped in Shanghai and Chongqing at that time because there was a great controversy in public opinion about it, “because China has already levied a high amount of land premium in the link of land transaction, and by default, the expected income from future land appreciation is covered inside, so is it legally appropriate to levy another tax in the holding link? “
At the same time, he also stressed that China’s housing market during the pilot period has not yet entered the stage of soaring property prices, local finances rely heavily on land sales, and if a full-scale property tax is levied, it is likely to hit the housing market and affect local fiscal revenue.
However, after the end of the property tax pilot, the central government’s real estate tax legislation has been stalled for a long time. in 2017, the central government has included the real estate tax in the five-year legislative plan. But in 2019, the legislative work in this area has slowed down significantly, and the Government Work Report for 2020 and 2021 does not even mention the real estate tax.
But the real estate industry professional above believes that by this stage, the conditions for a real estate tax are now in place for a variety of factors, “both in terms of technical control of real estate and the degree of public awareness of whether a real estate tax is levied or not, the foundation has been reached for a real estate tax to be levied.”
He noted that the real estate registration system, which began to be implemented in 2018, is creating a nationwide unified real estate real name registration, which provides good conditions for national control of real estate.
A woman looks at a real estate exhibition in Shanghai (AP)
Can’t hide widespread concerns
Real estate taxes are widely seen as serving to regulate income and redistribute it. Some even point out that a real estate tax could pinpoint the wealthy class who hold multiple properties.
Xia Yeliang, on the other hand, is skeptical of this effect. He believes that the truly wealthy may not care about real estate taxes, or may be able to rent out their properties and still benefit more than they spend.
What will really be affected is perhaps the middle class who own two or more properties, “If he has two or three houses, except one for his own use, the rest of the houses are subject to higher real estate tax, he can’t stand it anymore and may take them out to sell. In fact, for the urban middle class, it is a heavy burden.”
Both Xia Yeliang and the professional also mentioned that the process of real estate tax implementation should be able to focus on their own officials and not leave them open for exploitation.
At the same time, the collection of real estate tax is also considered as a possible blow to real estate prices, affecting bank assets and assets denominated in properties. But that professional believes that most of China’s banks are owned by the state and that the government has ample room to regulate non-performing bank assets.
In addition, China has implemented a rent-to-own scheme and has built a large number of low-cost housing units, which can serve as a cushion for the impact of the real estate tax on property prices.
There are also many people who believe that the motivation behind the real estate tax is that local governments’ land finance is breaking down and they urgently need to broaden the source of tax revenue. 1994 saw the formation of the central and local finance taxation system, and the local finance revenue model, which is mainly based on the sale of land and housing, has gradually decreased in recent years, posing a challenge to local finance.
This view reflects the local tax attributes of the real estate tax itself and the local differences it may cause.
Fu Isaac fears that the real estate tax, when implemented, will mainly hit the cities below the third tier, “these places in the case of population decline, many people already hold a lot of unsold houses, add this tax to the situation will be even more depressed.”
In contrast, he believes that in first- and second-tier cities, the real estate tax will only allow people who own multiple properties to pass the burden on to tenants, with the result that property prices will instead rise.
“In the end, probably except for a very few places such as the north, most places may eventually choose to abandon the real estate tax after repeatedly weighing it again. In this way down to how much this tax can be collected, which is a very doubtful thing.”
In fact, late last year the Chinese Academy of Social Sciences released the China Housing Development Report (2020-2021), which suggested that a real estate tax is now being piloted in some hotspot cities and cities where speculation has been repeatedly banned. This also shows that the central government is concerned about the situation in different places.
Xia Yeliang, on the other hand, suggested the real estate tax rate, “China’s real estate tax cannot be so high right away, it should be gradual and give the people some time to adapt as China’s economic wealth accumulates.”
He stressed that setting the real estate tax too high right off the bat may not serve the purpose of fighting corruption and curbing the mega-rich, but will instead put enormous pressure on the middle class who are saving money to buy two or three houses.