Protected Property

Real estate tax reform has been on the Chinese government’s work agenda for a few years now. At the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) held in November 2013, the government claimed that it would begin the reforms with fresh legislation.　

But in a country where real estate prices are soaring every year, and where buying a house is a family’s biggest investment – and heaviest burden – anything related to housing touches a nerve. Although officials have often stated that they want to restructure the tax system around the real estate industry instead of just adding a new tax, public opposition is strong. And experts remain deeply divided on how the tax should be collected, and how heavy it should be. 　

There’s no direct “real estate tax” in China at present. Under the current system, real estate-related taxation concentrates on construction and turnover, including an incremental tax on land value, the regular income tax on the profits from house sales and a contract tax. The current property tax system only applies to companies or individuals that own a house for commercial use. 　

The side effect is that local governments are heavily reliant upon the sale of land, where they receive a cut of the proceeds, rather than being able to rely upon a steady property tax base. This dependence deepened when reforms in the 1990s redirected many taxes toward the central government. 　

The new law, however, aims to regularly tax property owners. It was first suggested in 2003, when a booming real estate market was stimulated by an array of policies, including efforts to boost consumption, reduce savings, raise the wages of government employees and give individual house purchasers various privileges. 　

Before the 1990s, urban housing was generally assigned through one’s work unit. Ever since that decade’s reforms, everything has changed. “Since housing is now commercialized, real estate has become private property. So it’s reasonable to replace the ‘turnover tax’ with a ‘property tax,’” Gui Guojie, the general manager of a government-backed real estate company based in Shanghai, reported to the State Council. His proposal was echoed by then vice premier Zeng Peiyan. 　

In October 2003, the CPC issued a document on improving the socialist market economy system, proposing to collect the property tax “at a proper time,” while canceling some other taxes related to real estate. Analysts believed this was the first move toward a new system.　

But the real estate tax wasn’t brought up again until 2009. And it wasn’t until 2011, following a new package of policies to curb rocketing prices, including restricting mortgages for single families buying second homes and requiring higher deposits, that reforming property tax became an oft-proposed idea in official documents.　

The same year, two municipalities, Shanghai and Chongqing, took the lead in launching trial runs for the tax. In Shanghai, families who bought second apartments with an area of more than 60 square meters per family member were taxed. In Chongqing, the tax applied to the owners of independent villas or high-end apartments where the price was at least double that of the local average. 　

In November 2013, the central government issued a notice requiring authorities to speed up legislation on a property tax. Two years later, the National People’s Congress (NPC), China’s highest legislative body, announced they were working on it. 　

Although the government is behind the idea, public arguments have never ceased, with opponents of the new tax drowning out the voices of supporters. Worse still, the pilot programs in Shanghai and Chongqing are widely believed to have failed to establish a clear reference point for the launch of a nationwide reform. 　

“Both Shanghai’s and Chongqing’s experiences were more a means of market regulation than a property tax,” Meng Xiaosu, the director-general of China National Real Estate Development Group Co and a proponent of real estate tax reform, told NewsChina. 

“Although Shanghai’s and Chongqing’s schemes were easy to implement, their coverage was too limited to influence the real estate market and the tax reform,” Gu Yunchang, the chairman of China Real Estate Chamber of Commerce and deputy director of the policy committee of experts for China’s Ministry of Housing and Urban-rural Development, told our reporter. 　

According to Meng Xiaosu, the new system should be a property tax that is applied to anyone who owns a private home.　

“It is inappropriate for homeowners to be exempt from the costs of maintaining and repairing their homes after they have bought them. Since local governments currently have to bear the costs, they transfer the burden to farmers by expropriating land from them at a low price, then selling the land to developers at a much higher rate. This is unfair to the two disadvantaged groups of farmers and new property buyers,” said Meng. “The current pooling of interests is not reasonable… Homeowners have enjoyed the added value of having a house without any of the costs,” he added.　

Most homeowners, however, don’t want the burden of a new tax. Since all land in China is still owned by the State, and “ownership” only means a 70-year lease, opponents of the new tax argue that they are not really property owners at all. 　

Zhu Zhengfu, a legal expert in Guangdong Province and a member of the Chinese People’s Political Consultative Conference (CPPCC), China’s political advisory body, is one of the opponents. “China’s soaring housing prices are largely due to the rising land-fees [collected by local governments from developers] while the houses themselves are actually depreciating. How have we separated the house from the land?” he said at a local people’s political consultative conference of Guangdong Province meeting in 2011. “Meanwhile, as the government has already collected land use tax in urban areas, it 

would be double taxation to collect real estate tax,” he added. 　

His opinion was shared by many other experts who have criticized the new real estate taxation for “having no legal basis” due to public ownership of the land. 　

Officials, however, reject this idea. Jia Kang, the former director of the Chinese Academy of Fiscal Science under the Ministry of Finance, said: “I don’t think that public ownership of the land contradicts the collection of real estate taxation, which applies to the ownership of a private home… Those who own a private house are independent entities and the government should balance their interests through taxation.” 　

In a range of media interviews, many officials have emphasized that the new real estate tax is different from a pure “house property tax,” and that the government wished to shift the taxation to the “possession link” to help curb investment and speculation, which they argue have further raised housing prices. 　

Opponents, however, said that the effects vary depending on local supply and demand and that if a city has higher rigid demand of houses than supply, it will form a seller’s market, in which the sellers will transfer the increased cost from tax to the buyers by raising housing prices. According to well-known independent economist Lang Xianping, housing prices in Shanghai have grown by over 17 percent since its experiment with a real estate tax.　

More supporters, including Meng Xiaosu and Jia Kang, believe that the new real estate tax will be helpful to China’s land reforms. With taxation to focus on possession rather than turnover, farmers will be encouraged to transfer their land, which will help increase the supply. 　

Officials also hope that a regular property tax base could allow local governments a steady income and reduce their dependence on land sales. But since land sales are such a huge proportion of government income at present, opponents worry that homeowners will face a heavy burden if asked to make up the gap. 　

At a financial forum in May 2015, Ren Zhiqiang, a real estate billionaire and deputy director of the China Real Estate Association, said that the local government of Shanghai has received just 200-300 million yuan (US$30-45m) from the pilot program, which didn’t even cover the cost of collecting the tax. 　

“Current [real estate] taxes make up about 11-13 percent of the government’s revenue, while land sales occupy about 78 percent. How could the new tax suppress the local governments’ craze for selling land?” said Ren. 　

But officials point out that the reform isn’t a matter of just removing or adding a tax, but a reconstruction of the entire system, making it harder than carrying out equivalent schemes in the West.　

Even officials publicly admitted that there are still many obstacles in the way of reform. Finance Minister Lou Jiwei has stated that any new taxation system will be heavily challenged by the authorities’ current difficulties in gathering data and collecting taxes.　

“It is the first time that the government plans a real estate tax scheme, and we are facing a lot of difficulties… We need to ease public worries so that the public will accept the plan. Furthermore, we have to ensure that the tax will better stabilize the market and promote its healthy development,” Wang Juelin, a deputy policy director of China’s Ministry of Housing and Urban-rural Development, told NewsChina. 　

Given the strong public opposition, many supporters have proposed exempting those who own only a single apartment, although this possibility has not yet been confirmed by any official source. Given China’s high housing prices, supporters of the scheme believe that it could separate owner-occupied houses from those purchased as investments, thus benefiting ordinary people.　

Some officials like Meng Xiaosu, however, were against it. “The scheme actually lists some people as the targets of tax evasion. Furthermore, our outdated real estate registration system means we can’t correctly define whether or not an apartment is the first one for a family, and it may cause rampant ‘fake divorces,’” he told NewsChina. Due to the ease of divorce and remarriage in China, many couples in the past in areas experimenting with such schemes have “divorced” in order to create “separate families” and exploit various legal or tax loopholes. 　

Meng preferred the idea of collecting tax from all homeowners and then returning some of the collected tax based on each family’s individual circumstances, such as household wealth or the number of family members living under one roof. But the public have little trust in such programs, worrying that without oversight over the sums returned, the amount may only be a drop in the bucket. 　

Arguments also center on how the value of houses should be assessed; the price of purchase or the current market value. Since housing prices have soared rapidly in China, increasing ten or twentyfold in some areas in the last two decades, supporters of the former say that it would avoid ordinary families being hit with a huge cost from increased prices. But opponents argue that a tax based on the original prices would be meaningless today, since firms sold many old apartments to their employees at token prices.　

For officials, one of the main purposes of the tax, no matter how it’s collected, is 

narrowing China’s widening income gap. The basic principle is that the more houses you own, and the bigger they are, the more you should pay. But most people refuse to accept they’re on the rich side of the gap, especially since, after marriage, many families pour their entire savings into buying a house. “I am actually poorer than people without a house, since I have a huge mortgage and it won’t be paid off for 20 years,” Cao Gang, a 34-year-old man working in Beijing, told NewsChina, “I do have two apartments, but the other one is for my migrant parents who do not have a permanent residence permit in Beijing,” he explained. 　

Dong Pan, director of the real estate institute of Beijing Normal University, opposed blindly imitating Western models. “Unlike Westerners, who have relatively high wages and whose houses only occupy a small portion of their assets, Chinese people earn much less and property makes up a larger portion of their assets,” he claimed at an annual economics summit held by Internet company NetEase late last year. “Should we take away nearly all of a retired couple’s meager pension in real estate tax?” he questioned. 　

Like Dong, many opponents believed that a real estate tax is unfeasible and impractical in China. Yet officials are unshakable in pushing the reform. Several months before Finance Minister Lou Jiwei made his Septtember speech, Jia Kang revealed to the media that the NPC has set the legislation of real estate tax as one of its most urgent priorities. It seems that the see-saw battle between officials and opponents will continue.