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WSJ: China Ponders Imposing New Property Taxes

In Effort to Tamp Down Overheated Housing Market, Government Considers U.S.-Style Annual Tax Based on Home Values

APRIL 25, 2010

By ESTHER FUNG

SHANGHAI—China is considering introducing new or higher taxes on real estate, possibly even a U.S.-style property tax, which would mark a significant escalation of its struggle to cool down a booming property market now widely being described as a bubble.

How authorities handle any kind of property tax—the prospect of which is fiercely opposed by some property developers—will have significant implications for China's economy, and will ripple through global markets. The construction boom is the main driver of the current recovery in China, and is one of the few parts of the world economy growing strongly right now. Construction also underpins China's demand for raw materials, which has helped support global prices for commodities, such as copper and iron ore.

In recent months, many prominent local economists have urged authorities in Beijing to make more use of the powerful tool of taxation to curb property speculation and rein in runaway prices. China now levies several types of taxes on property sales, but authorities are said to be considering higher transaction taxes that target luxury properties, or possibly a tax on property values similar to the kind levied by local governments in the U.S.

The reasoning is that higher taxes will make it less attractive to invest in real estate. And giving local governments more revenue from property taxes could reduce their incentive to keep prices high to profit from sales of land-use rights.

Opponents fear new taxes would shatter confidence in the real-estate market, leading to a bust that would damage the entire economy.

In a notice last week announcing a package of policies to contain rapidly rising housing prices, China's State Council told tax authorities to speed up the drafting of tax policies that will "guide appropriate purchases of housing and regulate personal gains from property." The government has given few details publicly, and local media have in recent days been filled with conflicting reports about the different types of taxes that could be introduced in various areas.


"The details of the tax are very sketchy right now, but there is a sense of urgency from the government to ease prices, not just for economic reasons, but also for social reasons. The rich-poor disparity is troubling," said Wu Jianxiong, an analyst from Central China Securities.

Average urban-property prices in China rose an average of 11.7% in March, the fastest pace since the Chinese government began releasing the data in July 2005. Prices in major cities such as Shanghai and Beijing are increasingly making property unaffordable for large portions of the population, and have become a focus of public discontent.

China's government has promoted widespread home-ownership and has repeatedly said it will continue to support first-time home buyers even as it rolls out restrictive policies aimed at investors and speculators. So analysts expect any new tax policies to be imposed on high-end residences, or target individuals who have bought multiple properties.

Currently, China levies several forms of one-off taxes related to a property transaction, such as a stamp duty, an income tax and a transaction tax. Though many options are being discussed, many analysts and market observers think the government could impose what is being labeled as a "property consumption" tax on luxury property in select cities—a term that could be interpreted as a tax on anything beyond a primary residence.

A more radical change would be to start levying an annual tax based on the value of people's homes—the kind of property tax that a homeowner in the average U.S. suburb would be familiar with. This has been advocated by Chinese economists who say local governments need a more secure revenue source.

"The main purpose of such a tax would be to dampen speculative demand and to increase the costs of holding property for wealthy people," said Hingyin Lee, director of research and advisory from Colliers International.

Chinese media have reported that such a tax may be implemented in Chongqing, a vast city in southwestern China that has been a focal point of experiments in urban governance. In an interview with a newspaper backed by the official Xinhua news agency, Chongqing's mayor, Huang Qifan, said the city had proposed to the national government a plan for a Western-style property tax for high-end properties.

Chongqing has proposed an annual tax equivalent to 1% of the value of any home over 200 square meters that has sold for three times the average market price, Mr. Huang said in the interview. The tax would rise to 1.5% if a home sells for four times the average price, and would continue rising on a progressive scale up to 5% of the full house price. The interview didn't specify how the average price would be estimated.

A Chongqing city spokesman, Wen Tianping, confirmed the details of the plan and said it had been submitted to the State Council for approval.

In a potential sign of the sensitivity of the planned tax, on Friday the interview was no longer available on the newspaper's Web site. The Chongqing city spokesman said he didn't know why the the report had been taken down.

China now collects 1.2% annual tax on 70% to 90% of the value of commercial property, and analysts say another possibility would be to extend the commercial-property tax to third and subsequent homes by classifying such properties as income-generating.

Analysts said it is hard to predict how much further sales volumes and prices would fall under any new property-tax policy, given the lack of details over the tax policies, and that adjustments may have to be made to current transaction costs to avoid duplication.

"Sales of high-end residential homes will definitely be hit," said Johnson Hu, an analyst from UOB Kayhian. "Transaction volumes have already dipped this week as home-buyers take a wait-and-see approach."

—Aaron Back and Gao Sen contributed to this article.

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