Property, Talking Point

Xi calls for flat tax

Long discussed levy on property owners looks set to be launched


Home economics: a property tax looks imminent but it remains an acutely sensitive political topic

The Communist Party of China (CPC) was created with a core mission of redistributing the means of production. On taking power in 1949 it started to do that with gusto. Within a few years landlords were all but eliminated as a social class, for instance, and vast swathes of rural land had been reallocated for the use of more than 300 million peasants.

The Party became more receptive to the idea of private ownership after 1978, when Deng Xiaoping ushered in the reform era – but it remained a sensitive issue. Take the Property Law, which defines and protects property rights. The National People’s Congress (NPC) first started drafting it in 1993 but the legislation was only finally approved in 2007. That set a record for the lengthiest deliberation by the Chinese legislature.

Recent debate on a similarly sensitive topic – the taxing of real estate – has proceeded similarly cautiously. In conjunction with President Xi Jinping’s Common Prosperity platform, a newly proposed property tax could trigger a further redistribution of wealth from the urban rich. It might also revolutionise how local governments manage their finances and how cities promote their metropolitan economies. However, the enormity of this policy shift means there are vested interests that would like to derail the changes, or failing that, delay them. There are huge political and social risks in a botched implementation of the plan as well, so the focus on how the tax is going to be levied will be intense. Analysts are tracking whether there could be a rapid rollout (akin to Mao’s Zedong’s more aggressive ‘fight the landlord’ approach) or a more gradualist process (in keeping with most of the market and economic reforms of the last four decades). No surprise, perhaps, that the cautious approach seems more likely to win out out…

What’s new about the property tax plan?

On October 23 the standing committee of the NPC passed a resolution authorising the State Council to pilot property tax reform in designated regions of the country.

Xinhua then reported that a property tax could be levied on all types of residences in the areas picked for the pilot scheme – although rural homes have been excluded from the trial period.

Next up the Chinese cabinet will decide on a list of ‘pilot areas’, while the relevant authorities and local governments will be tasked with devising approaches for collecting the taxes in question.

The Chinese cabinet will then submit its proposed list of trial cities to the NPC for approval, with a date for initiating the five-year programme to be determined by the State Council.

Policymakers have been mulling such a tax for more than 20 years. However, a speech by Xi to financial regulators in the summer – and republished by the CPC’s bimonthly journal Qiushi this month – made plain that there was new impetus for the policy, from the very top.

As part of “concrete actions” to regulate China’s “higher-income groups”, Xi called for his administration to “vigorously and steadily advance” legislation for a property tax. The Chinese leader also demanded an expansion of the country’s sales taxes, as well as stronger “income redistribution management”, including a targeting of monopolies. Nevertheless it was his mention of the property tax that drew most attention from the property-owning public.

What progress was made in the past on a property tax?

The idea was earlier mooted in the 12th Five-Year Plan, a policy cycle which began in 2011. In the same year, Shanghai and Chongqing were chosen to carry out their own pilots of property tax schemes. In these trials homeowners of higher-end properties or second homes were taxed at annual rates, mostly below 1% of their property values. The trial went on for almost a decade. But it was not expanded to other cities and the central government said very little publicly about what it had learned from the experiment.

Over the last 10 years, a national property tax has come up for discussion from time to time, often after remarks made by senior officials or state-backed think-tanks. But the prospects of something actually happening started to look more likely after President Xi began to articulate new priorities for the real estate market – “houses are for living in, not for speculation,” as he bluntly put it – with his government starting to move the conversation forward on a property tax in a more systematic way (see WiC389).

For instance, a property levy got mention again in the 14th Five-Year Plan (2021-2025) but this time with a greater sense of urgency, with the blueprint stipulating that the authorities would legislate for property tax reforms as part of a broader plan to improve the tax receipts of local governments.

And in May this year, several central authorities, including the NPC, also joined hands to ‘solicit opinions’ from property market experts and economists on a pilot plan for implementing a property tax, state broadcaster CCTV reported.

Why has it taken so long?

The consensus among sector commentators is that Beijing is now more determined on moving forward with a tax at a national level. Yet there are plenty of cynics who doubt that much progress will be made with the pilot schemes, citing a lack of clarity on a timetable for introducing the new tax or any real detail on how it would be levied.

In other areas of policy, China’s central government often moves rapidly, with little room for red tape or delay once a decision has been made. For example, the action was swift in the crackdown on the private sector’s tutoring and edtech firms in July (see WiC551). In that case a directive jointly issued by the CPC’s Central Committee and the State Council saw nine leading cities (including Beijing) picked for another ‘pilot scheme’. The sweeping impact of the new limitations on the tutoring firms in these cities has already choked the commercial life out of much of the sector (their number has dropped by 60% in Shanghai, Caixin reported this week).

The lesson here, perhaps, is that progress can be rapid when there is political will. But the same determination has seemed lacking in the case of a property tax, where there has typically been more talk than action.

For instance, one of the key obstacles often cited for the plan is the absence of an effective land registry (see WiC182), with claims that it makes it more difficult to implement a tax. Critics say that the efforts to establish an ownership database have run into dogged resistance from Party cadres, however, perhaps over what might be revealed about the homes they own themselves (and the awkward question raised of how they have managed to pay for them).

However, much of the infrastructure to assess the tax is now in place, particularly a national registration system for fixed assets which became operational in June 2018. After the system went online, the Global Times reported that it was another signal that a property tax could not be far off.

Yet even with the underlying land registry infrastructure taking shape – and the advocacy of Xi Jinping in supporting it – the plan to roll out a nationwide tax is going to run into heavy resistance. Citing unnamed sources “with knowledge of government deliberations”, the Wall Street Journal has already reported that an initial proposal to test the tax in some 30 cities was knocked back. The plan was then reduced to about 10 urban areas after pushback from senior and rank-and-file members of the CPC.

Is it best to look at the tax as part of a broader reform plan?

Another source of resistance to the tax is likely to come from the local governments themselves. Provincial and city officials have relied on a development model that sources income from municipal land auctions driven by rising property values. The bureaucrats balance their fiscal books (or try to) with income from land sales. A property tax promises a recurring and more predictable source of income from the existing housing stock. However, it might also dent confidence and depress property and land prices in the shorter term, puncturing local economic growth. It would also force officials to rethink how they govern their fiefdoms, prioritising social infrastructure spending over their traditional development model of encouraging massive construction binges and banking on their trickle-down GDP impacts.

Making the transition to a property tax won’t be an easy task. According to data from the Ministry of Natural Resources, land sales income totalled Rmb8.4 trillion ($1.31 trillion) in China in 2020. This amounted to 84% of the fiscal income of local governments. Various analysts have made basic calculations that properties in urban China are worth a combined Rmb200 trillion. If you assume that a first phase of a new tax focuses on the more expensive properties, you are probably looking at a pool of about 15% of the stock being subjected to a small levy of something like 0.7%. That would generate Rmb210 billion in annual tax income for the local governments, which is a large shortfall on what they received from land sales last year.

Gu Ziming, a prominent blogger on the financial sector, has been pondering how this transition might work. A shortfall like the one above makes it seem impossible to substitute one source of income for the other, he says. But he also recalls the scorn levelled at reformers in the 1990s when they suggested scrapping the agriculture tax – a bedrock of China’s public finances for 2,000 years. Those that laughed at the idea hadn’t foreseen the rapid development of a private property market and the much bigger revenues it would raise for local governments through land auctions, he points out.

Gu believes the future of China’s public finances will depend on the emergence of new taxes such as the property tax, as well as other levies including a digital tax and a tax on carbon emissions. The latter is likely to become a subject of debate at the upcoming G20 and UN world climate summit in Glasgow.

What happens next?

In a report published this week, HSBC’s head of real estate research Michelle Kwok picks out the 15 cities she considers most likely to trial the property tax. Alongside Shanghai and Chongqing, her list includes Shenzhen, Hangzhou and Haikou. A few provinces might be chosen as pilot areas too. In June it was announced that Zhejiang will become a “demonstration zone” for policies designed to deliver on the Common Prosperity agenda, for instance.

When and how the tax will start to be collected is unclear. But interest will be intense as the changes could impact the finances of millions of households (as many as 85% of urban families own property). “The richest families can afford the tax, while low-income families will be less affected,” claimed Hu Xijin, chief editor of the Global Times. That said, the pilot programmes will be carefully calibrated to “what middle-class families can bear”, he added.

That, of course, gets to the political sensitivities of moving too fast. The dangers are twofold: first, the risk to social stability if there is middle class backlash against the new tax online; second, the disruption to a key engine of the economy (the real estate sector) that accounts for at least a quarter of Chinese GDP. Talk of a tax comes at a time when home prices have soared across a number of cities as well, increases the risks of a sudden reversal in sentiment. How a dramatic property downturn would play out for some of China’s financially-stretched real estate developers (think Evergrande) is another pressing concern for regulators too who will be wary of any outcome that might torpedo the sector at large.

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