Property

China&WorldEconomy/48—63,Vo1.16,No.4,2008

    ;PropertyTaxinUrbanChina

    ;DanLi,ShunfengSong

    ;Abstract

    ;ThispaperexaminesChina’Surbanhousingsectorandproposesthatpropertytaxreform

    ;beundertaken.Specifically,Chinashouldsignificantlyreducetaxesontransactionsand ;introducepropertytaxesduringthepossessionofhouses.Thiswillincreasehousing ;affordabilityasaresultoflowertransactionCOSTS,reducespeculationbecauseofthehigher

    ;opportunitycostofholdingvacanthouses,stabilizethefiscalsystembygeneratingmore ;sustainabletaxrevenue,andimprovetheefficiencyandfairnessofthepropertytaxsystem ;accordingtOtheprinciplesof”ability—to-pay’’and”userpays”.

    ;Keywords:housingprice,propertytax,reform

    ;匝codes:H20,R21,R31

    ;l_Introduction

    ;China’Surbanhousingpriceshavebeenincreasingdramaticallysince2002,drivenby

    ;strongdemandforhomeownership,housinginvestmentandspeculation.Aconsiderable ;imbalanceinhousingconditionsexistsbetweentherichandthepoor,resultinginsocial ;instability.Numeroustaxesandfeesmakehousingpricestoohighforthemajorityofurban ;residents,especiallythosewithaverageorlowerthanaverageincomes.Additionally, ;overheatingofthehousingmarketcausedheatingupofitssupportingindustries,suchas ;metalandcement,andstirredworriesofahousingbubbleandinflation.Urbanhousinghas ;becomeacriticalissuethataffectsChina’Seconomyanditspeople’Swelfare.

    ;Manyfactorscontributetotherisinghousingpricesandprevalenceofhousing ;speculation.Someareeconomical,suchasstrongerdemandasaresultofincomegrowth ;andurbanization.Someareinstitutiona1.suchasthelimitedlandsupplycausedbythe ;DanLi,CreditAnalyst,FirstIndependentBankofNevada,Reno,Nevada,USA.Email ;lidan818@hotmail.com;ShunfengSong,Professor,DepartmentofEconomics,UniversityofNevada

    ;Reno,Nevada,USA.Email:song@unr.edu.

    ;@20o8TheAuthors

    ;Journalcompilation@2008InstituteofWorldEcolaOmicsandPolitics,ChineseAcademyofSocialSciences

    ;

    ;PropertyTaxinUrbanChina

    ;monopsonyandmonopolypowerofthegovernment,whichacquireslandfromfarmers ;andleasesittodevelopers.Somepracticesoftherealestatemarketalsopushhousing ;priceshigherandencouragehousingspeculation,suchastheadvance—purchasesystem,

    ;whichrequiresbuyerstopaybeforetheirhomesareconstructed.Moreover,enormous

    ;lump—sumtaxesandfeesleviedontransactionsfurtherpushincreasesinhousingprices. ;Toreducespeculationandtostabilizehousingprices,since2003,policy—makersin

    ;Chinahaveintroducedaseriesofmacroregulations.Forexample,thePeople’sBankof

    ;ChinaissuedtheNoticeonFurtherStrengtheningtheManagementofRealEstateCredit ;inJune2003toregulatethefinancialpoliciesrelatedtorealestatemarketdevelopers. ;tighteningthegrantingofconstructionloansandthusreducingthenumberofconstruction ;loans.On31August2004,theCentralGovernmentrequestedthatalllocalgovernments ;stopleasingoutpubliclandunderinternalagreements,andthatallleasesbeimplemented ;throughtheopenmarketprocess.On16March2005,thePeople’sBankofChinaraisedthe

    ;mortgageinterestrate.On29May2005,thedocumentAdjustingHousingSupplyStructure ;andStabilizingHousingPriceswasissuedbytheStateCouncil.Asawhole,macro ;regulationscoverallaspectsofrealestateanditsrelatedindustries,fromthefinancial ;systemtothelandsystem,andencompassbothsupplyanddemandsides.

    ;However,macroregulationmeasureshaveworkedonlytoalimitedextent.Contraryto ;policy—makers’expectations,housingpricescontinuetorise.TheHousingPriceReportof

    ;August2006issuedbytheNationalBureauofStatisticsofChinaandtheNational ;DevelopmentandReformCommissionon13September2006showthathousingpricesin ;August2006hadincreasedby5.5percentonaveragenationwidefromAugust2005.Among

    ;the70citiesintheanalysis,68ofthemsawanincreaseinhousingprices(NBSandNDRC, ;2006).AccordingtoYuan(2006),theprice-incomeratioin2006reached15.76inShenzhen, ;l5.55inShanghai.13.55inBeijingand12.67inGuangzhou..Thehighprice-incomeratio ;stronglysuggeststheexistenceoflowhousingaffordabilityinurbanChina.Italsoindicates ;thatmacroregulationshavenothadmucheffectonhousingprices.

    ;TheChineseGovernmentmustreformthepropertytaxsystem,tocooldownthehousing ;marketandsavelocalgovernmentsfromfuturefiscalshortages.Underthecurrentsystem, ;homebuyerspaynumeroustaxesandfeesasalumpsumontransaction.Duringthetimeof ;possessionofahouse,however,houseownerspaynopropertytax.Thispropertytax ;system,whichwillbediscussedindetailinSectionII,isinefficientforseveralreasons. ;First,thehighlump—sumtaxesandfeesdramaticallyincreasehousingpricesandmake ;urbanhousingunaffordableforordinaryurbanhouseholds.Second,zeropropertytaxes ;duringhousepossessionencouragespeculationinthehousingmarket,whichleadstothe ;Thepriceisbasedona90mflatandtheincomeisfora3-personhousehold

    ;@2008TheAuthors

    ;Journalcompilation~2008InstituteofWorldEconomicsandPolitics,ChineseAcademyofSocialSciences

    ;

    ;DanLi,SunfengSong/48—63,Vo1.16,No.4,2008

    ;inefficientuseofresidentialproperties.Third,zeropropertytaxduringhousepossession ;alsoviolatesthe”userpays’’principleinpublicservicesandcausesfuturefiscalshortfalls

    ;forChineselocalgovernments.Therefore,itisimportanttoreformChina’spropertytax

    ;systemandtoestablishanewsystemtoimprovehousingaffordabilityandfiscal ;sustainability.

;Inthispaper,weexamineChina’sproperlytaxsystemandanalyzeitsimpactonhousing

    ;affordabilityandgovernmentfiscalsustainability.Consequently,weproposethatChina ;shouldsignificantlyreducetaxesinconstructionandontransaction,andlevypropertytax ;duringtheperiodthatahouseisowned.Thiswillincreasehousingaffordabilityasaresult ;oflowertransactioncosts,reducespeculationbecauseofhigheropportunitycostsof holdingvacanthouses,stabilizethefiscalsystembygeneratingmoresustainabletax ;

    ;revenues,andimprovetheefficiencyandfairnessofthepropertytaxsystemaccordingto ;theprinciplesof”ability-to-pay’’and”userpays”.

    ;Thispaperisorganizedasfollows.SectionIIexaminesChina’scurrentpropertytax

    ;systemandanalyzesitsinefficiencies.SectionIIIprovidespolicyrecommendationsfor ;propertytaxreformanddiscussespossibleconsequencesofthereform.SectionIVconcludes

    ;thepaper.

    ;II-CurrentPropertyTaxSysteminChinaandIts

    ;Ine仟iciencies

    ;1-CurrentPropertyTaxSysteminChina

    ;China’scurrentpropertytaxsystemwasformedafterthegeneraltaxreformin1994,which

    ;establishedthetax-sharingsystembetweenthecentralandprovincialgovernments.Real ;estatetaxesandfeeswereclassifiedaslocaltaxesandcollectedandadministeredbylocal ;taxbureaus.Localgovernmentsretain100percentofallproperlytaxrevenue(Hong,2005). ;Sincethen,realestatetaxeshavebecomeasignificantpartoflocalgovernmentrevenue. ;SeveraluniquefeaturesmakeChina’spropertytaxsystemcomplicatedandinefficient.

    ;First,urbanlandinChinaisownedbythestateand,therefore,propertyownersonlyhave ;theuserrightoftheland.Becauseoftheseparationoflandownershipandproperty ;ownership,thepropertyownerneedstopaytaxesforboththepropertytheyownandthe ;landtheyleasefromthestate,intheformofhousingtax,andurbanandtownshiplanduse ;tax,respectively.ThehousingtaxisimplementedbyProvisionalRegulationsofthePeople’s

    ;RepublicofChinaonHousePropertyTax,promulgatedon15September1986bytheState ;Council.Itisataxleviedontheproperty’sacquisitionvalue,witharateof1.2percent.The

    ;urbanandtownshiplandusetaxisregulatedbytheProvisionalRegulationsofthePeople’s

    ;@2008TheAuthors

    ;Journalcompilation~2008InstituteofWorldEconomicsandPolitics,

    ;ChineseAcademyofSocialSciences

    ;

    ;PropertyTaxinUrbanChina

    ;?

    ;RepublicofChinaonUrbanandTownshipLandUseTax,promulgatedon27September ;1988bytheStateCouncil.Thereisachargeforusingthestate—ownedland,andeach

    ;provincialgovernmentcandeterminethetaxratethemselves.Bydefinition,thehousingtax ;andurbanandtownshiplandusetaxtogethermakeuptherealestatetaxinChina. ;Second,housebuyerspaynumeroustaxesandfeesduringhousingtransactions,but ;notduringthedurationofownership(Songela1.,1999).Therefore,houseownerspay ;propertytaxesonlyonce.Taxesandfeesincluderifletax(asof1June2005,itis2percentof

    ;thepriceforhouseslessthanorequalto144mand4percentforhouseslargerthan144), ;contractstamptax(RMBS),certificatestamptax(O.05percentoftheprice),registrationfee ;(RMB80),certificateofownershipfee(RMB10),mappingfee(RMB0.8perm2),securityappraisal

    ;fee(RMB4perm2),assessmentfee(0.42percentoftheprice),maintenancefee(2-3percentof

    ;thepnce),termiteprotectionfee(RMB200perunitforhousesbelow50rn2,IIB300perunit ;forhousesbetween50and8Om2.RMB400perunitforhousesbetween8Oand100m,and ;RMB500perunitforhousesover100m).Foranaveragesizedhouseof70matanaverage ;pricelevelofRMB3800persquaremeter.thetransactionpriceiSRMB266000.Theminimum

    ;taxesandfeeswouldbeRMB15281,whichis5.7percentofthetransactionpriceand ;approximately72.8percentofthe2006averageannualincomeofChineseurbanworkers, ;whichisRM21001(NBS,2O07).

    ;Third,thehighpropertytaxburdeninurbanChinaislargelydisguisedbecauseit ;occursmostlyintheconstructionphaseand,therefore,becomespartofthehousingprice, ;whichincludestheland—usefee,taxesandotherfees,constructioncostsandprofits. ;AccordingtotheChineseHousingBureau(CHB,2006),thelandpriceplustaxesandfees ;accountsformorethan50percentofthepriceofahouse,constructioncosts30-40percent, ;andprofitsmakeuptheremaining10-20percent.Table1showsastudyofhousingprice ;Table1.HousingPriceCompositionofXi’aninChina,2006

    ;(persquaremeterl

    ;1temAmount(RMB)Amount(US$)Percentage

    ;Houseprice22OO一3100275-387.5100

    ;Landcost600-90075一ll2.27_29

    ;Taxesandfees40_60025—37.520

    ;Constructioncost7OO一8oo87.5—10026—32

    ;Profit34_6O042.5-75l5—20

    ;Source:HexunWeb(2006)

    ;@2oo8TheAuthors

    ;Journalcompilation~2008InstituteofWorldEconomicsandPolitics,ChineseAcademyofSocialSciences

    ;

    ;一DanLi.SunfengSong/48—63,vot.16.N0.4,2008

    ;compositionin2006compiledbyHexunWeb(2006)usingthedataforXi’an,acitywith

    ;averagenationalhousingprices.

    ;Landcostisalump—sumleaseholdchargethatrealestatedeveloperspaytothe

    ;governmentforacquiringland—userightsfor70years.Itrepresents30percentofhousing ;Drices.AccordingtotheLawofLandAdministrationoffPeople’sRepublicofChina

    ;promulgatedandamendedbytheNationalPeople’sCongress,localgovernmentsshare

    ;thisrevenuewiththeCentralGovernmentona70:30percentsplitbasis.Taxandfeepaymen~

    ;togethermakeupapproximately20percentofhousingprices.Constructioncosts,accounting

    ;forapproximately30percentofhousingprices,arerelativelylowcomparedwiththeUSA, ;forexample,whereconstructioncostsaccountsfor70percentofhousingprices,whereas ;landcostandprofitaccountforapproximately20and10percentofhousingprices, ;respectively(ZhangandJiang,2004).Itisalsocommonlyarguedthattheprofitrateof ;Chineserealestatedevelopersisconsiderablyunderestimated.Asrevealedinacostlistof ;anewly.builtresidentialsubdivisioninFuzhoucity,profitrepresentsapproximately37 ;percentofthehousingprice(Cheneta1.,2005).

    180taxesandfeesapplicabletoreal ;AccordingtoAnandWang(2005),thereare60—

    ;estateconstruction,varyingacrosscities.Duringlandacquisition,22taxesandfeesare ;levied,includingleaseholdcharges,whichistherentforlanduserights,thecity ;infrastructurefee,thelandmanagementfee,relocationcompensation,landtitletaxand ;businesstax.Duringconstruction,atleast20taxesandfeesarelevied,includingbusiness ;tax.citymaintenanceandconstructiontax,andfeesforfacilitiesprovidedtothecommunity, ;suchasroads,water,gas,electricity,sewage,wastedisposalandparkinglots(NPB,2003). ;Besidestaxesandfeesthatarerequiredbylaw,therearemanyotherfeeschargedby ;governmentsatdifferentlevels.Somecitieschargemorethan200typesoftaxesandfees, ;mostirrelevanttohousing(Songeta1.,1999).AsurveyinShanghaishowsthatl15taxes ;andfeesareunnecessary(Lu,1996).Itwasestimatedthat,in1998,allfeescollectedfrom ;realestateindustryamountedtoRMB120-150bn,whereastaxrevenuefromtherealestate ;industrywasonlyRMB45bn,approximatelyone—thirdofallfeerevenue(AnandWang,

    ;2OO5).

    ;2.AnalysisoftheInefflcienciesof

    ;thePropertyTaxSysteminChina

    ;TheabovefeaturesmaketheChinesehousingmarketandpropertytaxsysteminefficient. ;Hightaxesandfees,includingtheonetimelump—sumlandleaseholdcharge,dramatically

    ;raisehousingprices,makingurbanhousingunaffordableforaveragehouseholds.The ;housingprice-incomeratio(P/I),thestandardindicatorofhousingaffordability,isdefined ;astheratioofmedianhousepricedividedbymedianhouseholdincome.Thehigherthis ;@2008TheAuthors

    ;Journalcompilation@2008InstituteofWorldEconomicsandPolitics.ChineseAcademyofSocialSciences

    ;

    ;PropertyTaxinUrbanChina

    ;—

    ;ratiois,thelowerhousingaffordabilitybecomes.Table2presentsP/Iratiosfor37major ;Chinesecitiesin2004basedonanaveragesizeof90m.

    ;Table2showsthat,in2004,almostallcitieshadP/Iratioshigherthan6,withsome ;exceeding10,andanaverageof9.4.After2004,theactualP/Iratiosbecomemuchhigher. ;AccordingtoYuan(2006),theP/Iratioin2006reached15.76inShenzhen,15.55inShanghai,

    ;l3.55inBeijing.and12.67inGuangzhou.ThehighP/Iratiostronglysuggestslowhousing ;affordabilityinurbanChina.

    ;Zeropropertytaxduringtheperiodofownershipofahousecouldreducethefunction ;ofpropertytaxinresourceallocation.Oneoftheeconomiccharacteristicsofpropertytaxis

    ;itscapitalizationoffuturecashflow,whichmeanstheexpectedstreamoffutureproperty ;taxpaymentsinthelifetimeofahousewillbereflectedinthehouse’spresentmarketvalue.

    ;Withthepresentvalueoftotalpaymentsequivalenttozeropropertytax,paymentsare ;allocatedtodifferentphasesofthehousepossession.Asaresult,ahighpropertytax ;wouldlowerthepresenthousingpriceanddecreasetheincentiveforowningaproperty. ;Forspeculatorsandinvestors,ashousingpricesincrease,sodotheirpropertytaxcosts, ;whichmaketransactionsriskierandlessprofitable.Withoutapropertytax,thecostof ;holdingapropertyisalmostzerowhiletheappreciationofhousevalueovertimecanbe ;fullyrealized.Thisencouragesspeculationinhousingmarketsandleadstotheinefficient ;useofresidentialproperties.Adirectwayofobservingthisinefficiencyisthehighhousing ;vacancyrate.In2005,accordingtoanestimationbytheChineseMinistryofConstruction, ;17percentofresidentialhousesinBeijingwerespeculativepurchases,ofwhich48percent ;wereleftvacant,waitingfortheappreciationofhousingvalue(PBOC,2005).Speculation ;notonlyresultsinabigwasteofresources,butalsopushesuphousingprices,whichin ;turnmakeshousinglessaffordabletoordinaryurbanresidentsandresultsinserious ;imbalancesinlivingconditions.

    ;PotentialfiscalinsufficiencyisanotherproblemassociatedwithChina’scurrent

    ;propertytaxsystem.IntheUSA,propertytaxesserveasoneofthemostimportanttaxes ;collected,andconstituteone-thirdoftotalrevenuetostateandlocalgovernments.Because ;propertyisdurableandrelativelyeasytoassess,propertytaxisaveryreliabletaxforlocal ;governmentsandgeneratessustainablerevenuethroughthelifetimeofproperty.Inthe ;USA,propertytaxisassessedonanadvalorembasis,witharatedeterminedaccordingto ;anestimatedbudgetofprovidinglocalpublicservices,educationandotherservices. ;Hence,afiscalbalancecanbemaintained.InurbanChina,thecurrentsystemthatexempts ;residentialpropertiesfromtaxesduringthedurationofownershipofahouseviolatesthe ;“userpays”principle.Thismeansthaturbanresidentsusepublicserviceswithoutpaying

    ;userfees,causingpotentialfuturefiscalshortfalls.Somemightarguethathouseowners ;haveakeadypaidforthepublicservicesthroughmanytaxesandfeeswhentheybought ;@2008TheAuthors

    ;Journalcompilation@2o08InstituteofWorldEconomicsandPolitics.ChineseAcademyofSocialSciences

    ;

    ;一DanLi,SunfengSong/48—63,Vo1.16,No.4,2008

    ;Table2.HousingPrice-IncomeRatiofor

    ;China’S