What is China's newly launched pilot program for real estate tax?

      On April 25th, the Minister of Natural Resources announced at the National Conference on Natural Resource and Real Estate Registration that China has fully implemented unified registration of real estate.

      Unified registration of real estate is a necessary but insufficient condition for collecting real estate tax. If taxes are to be collected in the future, legislative processes must be followed. However, pilot programs in hot cities such as Xiamen and Shenzhen may be implemented first. Considering the current early stages of economic recovery and the real estate market has not yet emerged from its predicament, it is suggested that the real estate tax pilot program be postponed and that the focus should be on development as the top priority. After the economy fully recovers, exploration of pilot projects for collecting real estate taxes can be resumed. Priority should be given to the most pressing issues. The most important thing for the current real estate market is to boost confidence in the property market and establish new models.

      In the long run, the transition from land finance to real estate tax is a trend in China. Currently, the top priority is to restore the economy, and there are five main considerations:

1. The main reason for the real estate tax pilot program is that local finances in China are tight. The era of large-scale real estate development has ended, and we have entered the era of stock housing. Therefore, new sources of finance need to be raised. In some cities, the real estate market is sluggish, there is a large area of unsold land, and small and medium-sized enterprises are facing difficulties, all of which have a major impact on local finances. Implementing the policy of "housing is for living, not for speculation", regulating housing prices, guiding reasonable housing consumption, and efficient use of land resources are vital to promote the steady and healthy development of the real estate market.
2. The pilot program should mainly focus on hot cities with greater pressure on rising housing prices, such as the Yangtze River Delta, the Pearl River Delta, Beijing-Tianjin-Hebei and other regions, as well as some central cities in some regions. It is expected that cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Hangzhou, Ningbo, Suzhou, Dongguan, Sanya, Haikou, Chengdu, Xi'an, and Xiamen are likely to gradually be included in the pilot program for collecting real estate taxes.
3. The collection plan: under the basic principles determined by the State Council of China, each region should adopt different policies according to their specific circumstances. Considering that the pilot program will be implemented before legislation, a relatively simple collection plan may be adopted to ensure a rapid launch. For example, taxes can be levied according to the average tax rate after determining the deductible area and amount based on the size of each family. Therefore, the plan should not be too complex to guarantee a speedy launch, and can be gradually improved later. It is suggested that taxes and fees in the inventory phase should be collected, and taxes and fees in the transaction phase should be reduced. The burden on the general public should not be excessively increased.
4. The pilot program should be implemented progressively, and a certain amount of deductible area should be set. For low-income and first-time home buyers, their tax burden should be reduced or exempted. Therefore, after deducting the deductible area, the impact on most first-time buyers will not be significant. However, the tax on multiple houses and luxury homes for speculation may be considerable.Regarding the real estate market, there will be short-term impacts, but the long-term impact is not significant. Although there is no best timing, the Chinese real estate market has just experienced the coldest winter in the past 20 years, and there have been brief signs of recovery recently, so the pilot program should not be implemented too quickly or heavily.The long-term depends on supply and demand. For areas with population outflow and an oversupply of commercial housing, it will be even more difficult. For areas with population inflow and a shortage of commercial housing, although there may be short-term impacts, they may be offset by rising housing prices or rents.As the number of Chinese homebuyers and the total population peak and decline, and the housing stock reaches a basic balance, the real estate market will enter a period of "structural differentiation," and the performance of the housing market in different regions will not be the same. According to the analysis framework of "looking at the population in the long term, land in the medium term, and finance in the short term," cities with net population inflows and fast inventory turnover have potential, while cities without prominent advantages in industries, population outflow, and high inventory levels will face greater pressure to sell off.
5. The transition from land finance to real estate tax is the general trend. The urbanization rate of China's permanent population has reached 65%, and considering the family members of migrant workers staying in rural areas, the urbanization rate is close to 75%. Urbanization has entered its final stage, and the era of large-scale development is gradually coming to an end, entering the era of stock.

      Various countries have different forms of property tax policies. From the perspective of the tax base, there are mainly two types: one is based on virtual rent as the tax base, and the other is based on assessed value as the tax base. From the perspective of tax rates, developed countries mainly adopt progressive tax rates and average tax rates. From the perspective of tax preferences, developed countries mainly use tax deductions, deferred taxation, tax reduction, and tax exemption thresholds.

• In the United States, land and housing are integrated for taxation. Property tax is based on the assessed value, which is close to the market value, and the tax rate is determined by local governments "to support and collect." The United States implements an integrated tax system for land and housing, which is usually collected uniformly by county governments and then transferred to the corresponding departments. Real estate tax = assessed value x assessment rate x nominal tax rate. From the perspective of the tax base, the United States uses assessed value as the tax basis, and the assessed value is relatively close to the market value; some states do not levy the assessed value in full, but set an assessment rate to adjust the actual tax rate of different types of properties. From the perspective of tax rates, the United States determines tax rates by "supporting and collecting." Local governments determine tax rates based on budget expenditures and revenues, real estate assessment values, and assessment rates. From the perspective of tax preferences, the United States provides tax preferences for first-time homebuyers, the elderly, the disabled, and low-income groups through tax deductions and deferred taxation.
• The property tax in the UK originated from the "hearth tax" in mid-17th century England, which was a tax on the number of hearths owned by a household and was used to provide relief for the poor. Municipal taxes are levied on the housing preservation link, and the tax base is evaluated by the evaluation agency for housing value, divided into eight or nine levels. In 1662, the hearth tax was levied according to the number of hearths in each household. In 1989, the community fee levied on a per capita annual basis was adjusted many times, and the tax base went through many changes, such as the number of hearths, the number of windows, and the rental value. England, Scotland, and Northern Ireland divided the house value of each residence into eight grades of A-H in April 1991, and Wales divided them into nine grades of A-I according to the house value in 2003. The subsequent newly built houses are classified according to the prices of these two periods. In 2018, the proportion of A-I level houses in England and Wales was 24%, 20%, 22%, 15%, 10%, 5%, 4%, 1%, and 0%, respectively. The tax rate is based on D-level houses, and a fixed tax is implemented with a progressive tax rate. The tax amount of D-level houses in the UK is determined by "support and collection," and the municipal tax is a local tax that is determined by the financial budget deficit of each region to decide the tax amount of D-level houses in the region. By controlling government spending to limit the amount of housing tax payable, it effectively balances the tax burden relationship between fiscal needs and taxpayers.Currently, property tax on housing is an important source of revenue for local governments in the UK, mainly used for public expenses of local governments. According to the UK Statistics Office, in the 2020 fiscal year, England's municipal taxes collected a total of 32.2 billion pounds, accounting for 29% of all local government financial revenue.
• In Japan, fixed asset tax and urban planning tax are levied on property ownership, with assessed value as the tax base. If the assessed value is lower than the market value, a "burden rate" adjustment mechanism is set. Japanese municipalities collect fixed asset tax and urban planning tax from land and property owners every year. From the perspective of tax basis, the tax base for fixed asset tax and urban planning tax is the same, which is the assessed value of houses or land, assessed once every three years, and the assessed value of land is generally 70% of the previous year's land publicized price. The "burden rate" adjustment mechanism is set to avoid additional tax pressure caused by significant fluctuations in land prices. From the perspective of tax rates, the central government sets the benchmark tax rate, and local governments adjust it based on this. The benchmark tax rate for fixed asset tax has been maintained at 1.4% for a long time, and the tax rate for urban planning tax is between 0.2% and 0.3%. In terms of tax incentives, Japan uses a threshold as a tax incentive method, exempting land with assessed values below 300,000 yen and houses with assessed values below 200,000 yen from taxes.