China is the only major global economy that effectively has no real estate tax, but its government might be finally compelled to impose one.
Earlier this year, Chinese President Xi Jinping dispatched top deputy and senior vice premier Han Zheng to expand property tax experiments in more cities in an effort to potentially impose a real estate tax nationwide, according to the Wall Street Journal.
The move suggests Xi may be taking the most important step yet in his pledge to rein in China’s property market.
“Houses are for living in, not for speculation,” Xi has said in recent years, first in 2016.
On Oct. 16, Xi reiterated his commitment to reforming China’s property tax system, albeit absent a call to impose a nationwide real estate tax.
“We should actively and steadily promote the legislation and reform of real estate tax, and do a good job in the pilot work,” Xi wrote in Qiushi, the government’s top policy journal.
The Wall Street Journal reports that Xi’s aim to eventually impose a nationwide property tax has faced stiff resistance among China’s political elite, who argue that implementing one could crash China’s economy. But observers note that that same upper class may want to keep their personal property fortunes away from the prying eyes of tax collectors.
Despite potential pushback from the rich and powerful, property tax plans are gaining traction at the top levels of China’s government.
On Saturday, China’s state-owned newswire Xinhua reported that China’s top legislative body approved plans to expand a property tax pilot project to more urban areas across the country. Xinhua did not say which cities will be involved in the pilot project, but the scheme will take place over the next five years and levy taxes on all residential and nonresidential properties in pilot areas, excluding rural households, according to the report.
The lack of a property tax is not simply a quirk in China’s tax code, but a policy that has fundamentally shaped—and distorted—China’s economic boom. Experts have long agreed that imposing a real estate tax is necessary to stamp out the most unsustainable elements of China’s economic rise—namely rampant speculation and sky-high property prices—and help address financial inequality and drive more sustainable growth.
Still, overcoming the hurdles necessary to transition to a nationwide property tax has proved insurmountable to China’s leaders for well over a decade. Xi, China’s most powerful leader in a generation, may have just enough political clout and the will to make it happen.
Private property
In China, owning private property is a relatively new phenomenon.
When China’s first president, Mao Zedong, took power in 1949, the state seized all private property in China. Beijing did not reconsider the state’s exclusive hold on property until the 1980s, when Mao’s successor, Deng Xiaoping, began experimenting with private property ownership in select cities.
For example, the southern city of Shenzhen in 1987 began selling land-use rights to private developers to raise government funds, borrowing an idea from neighboring Hong Kong. The Shenzhen model took off across the country, and local governments began to rely on land sales to boost their coffers.
In 1998, then-President Jiang Zemin enshrined private property ownership into national law. At the time, imposing property taxes might have impeded the property development Beijing was encouraging, says Bo Zhuang, a China economist at Loomis Sayles. “The tax base was also very small; it didn’t make sense for them to collect a tax,” says Zhuang.
The tax base didn’t stay small for long. Opening property to private ownership—without forcing owners to pay taxes—sparked a boom in Chinese real estate. Buying real estate was long considered the only safe investment in China. Chinese households could pour their life savings into homes—whose value quadrupled between 2000 and 2018, according to economists Kenneth Rogoff and Yang Yuanchen—knowing the assets would never be taxed.
But the real estate market has grown to have outsize influence in China’s economy, accounting for 70% of China’s household wealth. In 2019, Goldman Sachs valued China’s real estate market at $52 trillion—more than twice the size of the U.S.’s market.
The real estate boom made sense in a China that was rapidly developing and urbanizing, but China can no longer count on continued growth in a sector that now makes up 29% of its economy.
The recent downfall of property giant Evergrande showcased the excesses of a sector where developers can accumulate piles of debt to build apartment buildings that might never be filled.
“There’s no way that China can continue to build at its current pace,” says Zhuang. “A property tax is probably the single most important thing you could do to make Chinese growth sustainable.” Imposing a property tax would reduce demand for apartments, and therefore discourage property developers from speculating on land and continuing to build new apartment blocks, Zhuang says.
In most developed economies, property taxes form a critical backbone of local government revenues. In the U.S., property taxes account for 30% of state and local revenues and local authorities have the power to impose their own income and other taxes to raise funds. Local Chinese governments, on the other hand, rely on land sales to account for roughly a third of local government revenues and have little autonomy to impose their own taxes owing to the central government’s near absolute power over China’s taxation system.
But the land sale faucet could run dry as local Chinese governments run out of land to sell or if demand for housing slips. Chinese developers, meanwhile, simply cannot keep making new apartment blocks at their current pace.
Larry Hu, chief China economist at Macquarie Group, says that local governments are overly reliant on land sales to fund basic government services. If Beijing wants to keep local governments solvent, imposing a property tax becomes the only politically feasible solution in helping rein in the country’s runaway housing market.
Hu says property taxes will ultimately become “a better source of fiscal revenue” for local governments than land sales because they can provide a more stable and consistent form of income that will be less dependent on land speculation and fluctuations in real estate prices. Lu Wenxi, chief analyst at property agency Centaline, told Reuters that property taxes could generate an estimated 70% to 80% of the tax revenues that local governments currently make via land sales alone.
Xi’s common prosperity
Calls for China to impose property taxes can be traced back to at least 2007, when regulators were already hoping to crack down on land speculation owing to soaring real estate prices and growing concerns that middle-class families could not afford to buy new homes.
In 2011, Shanghai and Chongqing began China’s first pilot program to enforce property taxes. Government officials pledged at the time that the experiments would become national policies. But in 2013, outgoing Premier Wen Jiabao shelved plans to expand the Shanghai and Chongqing experiments to other cities, meaning that discussions of imposing a property tax remained largely dormant until this week.
China’s political elite are among the world’s richest political figures and they often own vast real estate holdings. In 2018, China’s 153 wealthiest lawmakers were worth a combined $650 billion. The total net worth of the U.S. Congress, on the other hand, was roughly $3 billion in 2018, according to figures from research firm Open Secrets.
“The biggest resistance to a property tax is not from local governments. It’s political,” says Hu. If a tax takes effect, “those who own property will have to pay large amounts of cash.”
But since launching an anti-corruption drive as one of his first acts as president, Xi has shown more willingness than any other modern Chinese president to challenge the status quo of Chinese elite politics.
This year, Xi launched a new common prosperity initiative, aimed at redistributing wealth in one of the most financially unequal countries in the world. Hu says that property is the most “important source” of wealth inequality in China, creating a “generational gap” where younger Chinese citizens struggle to afford the houses that made their parents rich.
Zhuang believes a nationwide real estate tax announcement could come within the next few years.
“I believe Xi has a stronger will and is more powerful (than his predecessors) to push a property tax…It’s a new era,” notes Zhuang, explaining that a nationwide property tax plan could come as soon as early 2023, assuming Xi cements a third term as the country’s leader next year.
Still, even as China prepares to expand its property tax pilot scheme to new cities, opposition to a nationwide policy is fierce and may require a slow transition away from the current system.
Alfred Wu, a Chinese politics professor at the National University of Singapore, is less convinced that Xi’s administration has the willingness to enact a nationwide property tax.
He says that many of China’s rank-and-file government cadres, who, according to the Wall Street Journal, dissented to Xi’s property tax proposal in internal debates, are aging into retirement, and are likely to push back hard against any property tax plan that may put their retirement savings into jeopardy. He notes that the power of China’s middle-class homeowners should not be discounted either; they, too, would object to any measures that risk reducing the value of their properties.
Outside of China’s facing an acute economic crisis worse than the current Evergrande contagion, Xi might not be willing to completely overhaul China’s tax system given the immense political cost and his desire to prioritize the short-term health of China’s economy, Wu says.
“I don’t really see real determination from the current regime [to impose a property tax]” in coming years, says Wu.
Xi’s new property tax pilot program may ultimately become just another tantalizing experiment in China’s long quest in resisting much-needed reform.
