Debate: Property tax

China Daily, March 7, 2011

Dong Fan: A move that is faulty, confusing

Property tax, implemented on a trial basis in Chongqing and Shanghai municipalities, is far from being the right measure to cool the real estate market. Nor is the policy to impose such a tax scientific.

For example, the standards set by the Chongqing government are confusing and unfair. The local government is imposing the property tax on all villas, irrespective of whether they are up for sale or were sold in the past. But when it comes to high-end apartments, it is imposing property tax only on the new ones, which means people who bought such apartments in the past won't be subjected to taxation. Is there any justification in not imposing the tax on those who bought high-end apartments earlier?

Some people have swept the question of legality under the carpet and claim that the property tax will help deflate the property market bubble. But can the tax really bring down housing prices? The average housing price in Chongqing was 6,661 yuan ($1,014.5) in February, a month-on-month increase of 0.49 percent, even though the property tax was imposed on Jan 28. Speculators cannot be driven away from the real estate market because the profit they can make - with or without the property tax - is still much more than the cost of owning several houses.

The Chongqing government describes a high-end apartment as one whose floor space and transaction value are both more than two times the average in the city. This is a flawed logic, because few houses will meet the criterion.

Even Chongqing Mayor Huang Qifan has confessed that the total property tax revenue will be only 150 million yuan this year. The tiny amount will be just a token for a city like Chongqing, which collected 199.1 billion yuan in total revenue last year.

Property tax earnings cannot lessen the local government's dependence on land-based revenue, either. It is estimated that even if a property tax of 1 percent was imposed throughout the country, the total revenue would be about 500 billion yuan, less than even one-fifth of the 2.9 trillion yuan that transfer of land-use rights generated last year.

Moreover, in cities where most of land has already been transferred, the local governments would be forced to extend the tax to ordinary homeowners to earn maximum revenue, which will increase the recurring cost of owning a house.

The Chongqing authorities have said that people without local house registration (hukou), too, will have to pay property tax when and if they buy a house. This is further discrimination against middle-income migrant workers who are already in a disadvantageous position.

The government seems to be in hurry to impose new taxes. It has been increasing the number of taxes without making any effort to revise or eliminate charges that are outdated and unreasonable. As a result, the government's tax revenue and total income both have been growing at the astonishing rate of nearly 30 percent a year. Last year, the central government's tax revenue increased to 7.739 trillion yuan.

The burden being imposed on people and businesses will create long-term barriers for the next round of socio-economic development and thus increase commodity prices.

Some countries are taking or have already taken measures to ease the burden of homebuyers.

In Australia, for example, the total charges a homeowner will pay for water, electricity and maintenance, and the total depreciation are deducted from the price of the house that is taxed.

Instead of implementing such measures, our government is burdening people with more taxes in times of serious inflation.

Besides, there is incongruity between property tax as a short-term measure and the government's long-term goal of stabilizing the real estate market.

What the Chongqing government has imposed can hardly be called a property tax. It is charging property tax on the selling price of a house when a real property tax should be charged on a property's assessed value.

Since there is no independent institution to assess property value such a move will cause more confusion as property tax is extended to other cities. Hence, such a tax cannot be fair.

Dong Fan is director of the Real Estate Research Center at Beijing Normal University. These are excerpts of his interview with China Daily's He Bolin.