Investors and property developers have long viewed property tax as a threat. It would certainly increase the holding costs for property owners, especially those who have several properties. As such, it may force owners to sell some of their properties, which in turn may dampen the housing market.
Meanwhile, the property tax will mean a new income source for local governments, which have been highly reliant on land sales revenue for years. But it may also prompt local governments to tolerate deeper housing price corrections.
In an article published in the People’s Daily earlier this week, Finance Minister Xiao Jie touched upon this sensitive issue. Although his article did not make it quite clear, many readers thought Xiao aimed to publish a specific property tax rule in 2019 and implement it in 2020.
Xiao first outlined the principles behind a property tax, along with a roadmap to its eventual rollout, in a book that was published to help the public understand the lengthy work report that President Xi Jinping delivered during the 19th national congress of the Communist Party last month.
Currently, there is a pilot property tax scheme being implemented in Shanghai and Chongqing, which started in 2011. But both cities continue to lead other mainland cities in home price rises.
Part of the reason is that there are a lot of exemptions.
For example, the tax only applies to new purchases after the trial tax scheme became effective. First-time home buyers are exempted. Also, the levy is based on historical transaction value rather than on the typically much higher appraised market value.
A Shanghai millionaire who already owns a dozen properties before the government rolled out the property tax will not have to pay the tax on his properties.
If he has just bought another property at 5 million yuan (US$759,000), his tax bill, at the rate of 0.6 percent, will amount to just 30,000 yuan per year. Even if the market price of his new property doubles to 10 million yuan a few years later, his tax bill will remain at 30,000 yuan per year.
If the same property tax rule is applied nationwide, the impact will be very minimal. There are no details yet, but at least Xiao has confirmed that the new tax will be based on appraised value, so it will be harsher.
That said, Xiao also said a step-by-step approach will be taken, which means the tax might be rolled out in some cities first before being applied to others. In some cities, it may not be implemented at all.
Xiao indicated that local authorities will be allowed to use their judgment and adjust policy details such as the final tax rate and allowances to reflect the market situation in their respective jurisdictions.
This article appeared in the Hong Kong Economic Journal on Dec 21
Translation by Julie Zhu
[Chinese version 中文版]
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