China's property taxation experiments continue

At the end of October, the Standing Committee of the National People’s Congress announced that it had authorised the government to prepare a framework for testing new property taxation models. Implementation of the taxation experiments would be left to the provinces themselves. The experiments include all forms of real estate except rural residential housing and cover also the land rights that go with real property. The five-year experiment in seen to have a wider scope than previous experiments. However, specific details on where the experiments will take place, the size of the taxes imposed and the mechanisms for setting the taxes are to be announced later.

China already applies a number of real estate related taxes. For example, commercial properties have been taxed since 1986. Although taxation of residential housing has been under discussion, apartment owners have long been exempted. Two property taxation models have been tested in Shanghai and Chongqing since 2011 (BOFIT Weekly 5/2011, archived). The goal of those experiments was to reduce speculation in the local real estate market and rein in soaring apartment prices. Both experiments, however, were quite limited, and the amounts of tax revenue raised as well as the impacts on real estate price trends were marginal.

The new initiatives also seek to discourage speculation and create of a new stable revenue streams for local governments. A large part of local tax revenue currently comes via transfers from the central government or from sale of land use rights. Some observers see that the new tax model will make it possible to eliminate other property-related taxes and thereby simplify the tax code.

China’s reluctance about adoption taxes on residential real estate usually boils down to fears of reduced demand for apartment and falling apartment prices. In addition, policymakers are believed to commonly have extensive property holdings and an interest in resisting change. At its current stage, there are concerns the tax experiments could exacerbate the problems of the real estate sector if the current downturn continues. Announcement of a taxation experiment where the details are to be revealed later also fuels uncertainty in the real estate market.