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I highly recommend a recent article in the Economic Observer-A Property Tax is Coming … But Not as We Know It. (Original Chinese: ???????? ???????). I have written about the possibility of a new property tax in Will Declaring Chinese Officials’ Assets Cause ‘Chaos’? And Will That Delay The Introduction Of A Property Tax? and New Real Estate Regulations From China’s State Council That May Bite. Still No Property Tax.

The Economic Observer provides much more detail about what a tax might look like, echoing a description in the latest issue of Caixin’s Century Weekly. But if this article is correct (and if you believe the Shanghai Securities News it may not be) it is still not a done deal. Regardless, I think it is interesting to look at how the EO says a tax may be introduced. Here are some key excerpts:

Many Chinese property owners have been looking on with a sense of dread as economists and policy-makers have discussed the likelihood of the central government introducing a property tax (??? or wùyèshuì) to curb the rapid rise in housing prices in some of the country’s first-tier cities over recent weeks.

According to information obtained by The Economic Observer, an annual tax on the property assets of Chinese property owners will be piloted in four of China’s largest cities this year, but the tax will be different from the property tax that many first anticipated.

Instead, it’s been revealed that the central government plans to trial a real estate tax (???), in the cities of Beijing, Shanghai, Chongqing and Shenzhen within the year.

After the tax has been piloted in these four cities, it will be applied on a national scale.

The real estate tax was previously only imposed on properties being operated on a commercial basis and not on owner-occupied residences. Now it seems likely that residential properties that meet certain, as yet unspecified, conditions will also be subject to the tax.

Property Tax Shift

The EO has learned that the People’s Bank of China, China’s Banking Regulatory Commission, the State Administration of Taxation, the Ministry of Land and Resources, the Ministry of Finance and the Ministry of Public Security have been in discussions about when and how to impose a property tax.

According to some participants, all the parties agree that local governments are suffering from a lack of revenue and that the central government has no option but to work out a method of providing them with a stable source of fiscal income.

The piloting of a property tax in select cites and provinces in recent years – though the tax was never actually implemented, only trialled on a mock payment basis – was considered by many as a solution and that revenue from such a tax could serve as a major source of revenue for local governments.

But there are various obstacles hindering the implementation of such a property tax, including legal obstacles and disagreements over how to design and calculate the tax. As a new tax item, it needs to be approved by the National People’s Congress, a lengthy process, before it can be issued.

Real estate tax, on the contrary, is a tax imposed on the act of owning a property and has existed in the form of a temporary regulation. Revising an existing regulation only requires the approval of the State Council, a much simpler process than getting approval from the NPC.

Another factor that makes the introduction of a real estate tax more appealing than a property tax, is that land taxes are not effected by the introduction of a real estate tax.

On April 22, the EO learned from a reliable source that Beijing, Shanghai, Chongqing and Shenzhen will become pilot cities for the launch of the new real estate tax.

However, difficulties will also plague any attempts to reform the existing real estate tax regulations.

For example, if the tax is based on the value of housing, then the government needs to first ensure that all cities are capable of reasonably determining property values and that their is also a reliable system in place to accurately determine the number of houses owned by a particular individual.

Since information of this nature is not commonly shared between government departments, further negotiation is needed to tackle these technical issues.

Many economists and pundits have argued that China needs to introduce a property tax for two reasons: 1. reform the local land sale system to provide a stable, recurring source of revenue for local governments and wean them off their reliance on land sales for revenue; 2. cool housing prices. The local sand sale system is a primary source of local corruption and forced relocation disputes and violence, so reform of this system is very important. As for driving down prices, not all Chinese experts are convinced that a new tax will have a material, lasting impact:

With the property tax bogged down in negotiations, to what extent will the introduction of a real estate tax influence housing prices?

For those investors who own many or perhaps even dozens of properties, the property tax will increase the cost of owning a property, perhaps forcing them to sell their property, thus leading to a drop in housing demand which may well lead to a drop in prices.

However, an official with the Finance Bureau of Beijing explained, Chinese tax policies are neutral and are more about providing revenue than having an obvious effect on prices. He went on to add that policies related to bank lending had a larger effect on housing prices.

Though it is unknown how big of an influence the new real estate tax will bring have on housing prices, there is no doubt that it will increase the revenue of local governments.

Remember, the US has had a property tax for decades and it did nothing to prevent one of the largest housing bubbles in history.  The introduction of a property tax in major Chinese cities could have a short-term effect on prices, but there is no evidence to suggest that it would have a long-term impact on prices and housing affordability for most Chinese citizens.

UPDATE1: If you can read Chinese I highly recommend this recent article on the 21st Century Herald on the complicated dynamic between the central and local governments around real estate policies and revenue sharing-??????? ???????. If it is translated into English I will post an updated link.

Please tell me what you think in the comments.

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