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June 20, 2016

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Home » Supplement » Real estate

Benefit of property taxes takes time to materialize

Source: Agencies | June 20, 2016, Monday | Print Edition

CHINESE regional and local governments seem to be shifting focus onto collecting property taxes from land sales for maintaining their revenues. However, property taxes are unlikely to become a significant factor for Chinese governments’ income within the next two to three years because China currently lacks a property registration system to support accurate tax assessments and collections.

Up till now, land sales are still a major source of income for Chinese regional and local governments, accounting for 27 percent of their own-source revenues in 2015, while real estate-related tax receipts generated another 20 percent. These revenues tend to be volatile because they depend directly on the real estate market, which is prone to price fluctuations.

In March of 2016, the National People’s Congress committed itself to introducing property tax legislation as part of the country’s 13th Five-Year Plan. The objective is to replicate in China the revenue stability of local governments in more mature economies, which in many cases reflects a high dependence on property tax receipts.

We estimate that Chinese regional and local governments could collect combined annual property tax revenues of 237 billion yuan (US$36.1 billion), assuming an average tax rate of 0.6 percent, and that properties are on average assessed for tax purposes at 70 percent of their market value.

The 237 billion yuan would be equivalent to 7.3 percent of total land sales in 2015. At an average tax rate of 3 percent, total revenues from property taxes would rise to 1.2 trillion yuan, or 36.5 percent of total land sales in 2015.

But stable benefit of property taxes will take time to materialize. One obstacle to the roll-out of property taxes in China is that the country is still in the process of developing a property registration system to support tax assessments and collections.

The lack of an accurate registration system led to the failure of two pilot property tax programs launched in Shanghai and Chongqing in 2011 due to uneven enforcement and collection.

Property taxes have not yet been introduced in China aside from these two pilot programs. The current focus of the Chinese central government is to build a nationwide property registration system to ensure accurate assessment and collection of property taxes when they are eventually implemented across the country.

One year ago, a new registration system was introduced for real estate transactions. It is likely to take years before information on the existing stock of properties is added to this new system. Property taxes are therefore unlikely to become a significant credit factor for Chinese regional and local governments over the next few years.

As China continues to develop a more sophisticated local government financing system, property taxes have the potential to provide a stable revenue source as they do in many more developed economies.

To the extent that Chinese regional and local governments introduce property taxes, their creditworthiness will strengthen only if their overall exposure to volatile real estate markets and local economies is well managed.

Property taxes will likely become a more important revenue source in the long run for Chinese regional and local governments, as the country's economy matures. This revenue diversification would help offset an anticipated decline in land sales as the pace of urbanization in China slows to an expected annual average increase of 0.8 percentage points in 2016-2020, from 1.3 percentage points over the past 10 years.

The long-term impact of property taxes on Chinese regional and local government revenue stability also depends on the incentives of private property ownership, which are still developing in China. Private property owners’ ability to build land-based wealth and equity, and to pass it on to heirs, are a fundamental source of long-term tax revenue stability to regional and local governments in mature economies.

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