Policymakers have to ponder whether to expand pilot program after it fails to halt rising home prices, reports Wang Ying from Shanghai

It has been three years since China launched trials of property ownership taxes in Shanghai and Chongqing, but the goals of the duties, which include combating speculation in property market and reining in the home price rises, are far from being achieved.

It is now a thorny question for policymakers as to whether to expand the pilot program beyond the original cities, analysts said.

In January 2011, China started to levy property taxes on homeowners in Shanghai and Chongqing municipalities.

In Shanghai, if a family has a housing area of more than 60 square meters per person, it will be taxed at a rate of 0.4 percent or 0.6 percent of the total property price annually, depending on the apartment's price per sq m. If the price is above 27,740 yuan ($4,570) per sq m, the rate was 0.6 percent in 2013.

In Chongqing, the trial tax is focused more on taming investment speculation in high-end properties, with the rate set between 0.5 percent and 1.2 percent of the property price annually.

But the two cities' real estate prices, along with other major cities, have continued to rise in the past three years. Data released by the National Bureau of Statistics showed that new home prices in Chongqing in December soared 14.3 percent year-on-year, while new home prices in Shanghai surged by as much as 24.3 percent from a year earlier.

In addition, another goal of the pilot tax plan, which is to integrate and optimize China's taxation system and promote fair redistribution of resources, seems as far off as it was three years ago.

"Annual collected property tax has been about 100 million yuan in Chongqing, only accounting for 0.03 percent of the local government's total revenue," the Beijing Youth Daily reported.

This amount is in stark contrast with the land sales revenue in the southwestern city, which amounted to 116.4 billion yuan in 2013, lagging behind only Beijing and Shanghai.

In Shanghai, China's financial hub, the property tax collected in the past three years totaled about 600 million yuan, way below the aggregate 217.8 billion yuan land sales revenue during the same period, data compiled by property agency Centaline showed.

Analysts said apparently, the property tax has a very limited effect on local property markets, although it is hard to gauge this exactly given other market changes and policies that have been imposed in the meantime.

The limited impact of property tax is attributed to many factors, such as the small number of apartments that fall into the taxable range and low rates compared with stubbornly high home prices, said Joe Zhou, head of research for Jones Lang LaSalle East China.

"The key lessons from the trials in Shanghai and Chongqing are likely to be on the administrative side. How does one calculate the tax? How does one charge the tax? How does one collect the tax? Also, it is important to decide how to enforce the payment of tax," said James Macdonald, head of Savills Research China.

Chen Jie, a real estate research professor at Shanghai University of Finance and Economics, agreed, adding that more time and wider discussion on the property tax are needed before expanding it nationwide.

"The central government promotes the property tax in its drive to offset the shortage in local government's revenue, strike a balance between rich and low-income families, and tame soaring home prices, but the reality is more complex," Chen said.

There are at least 8 million residential apartments in Shanghai, but only about 70,000 homes are subject to taxation, meaning less than 1 percent of the homes are actually being taxed, according to Chen.

In comparison, the city posted about 100 billion yuan in land sales revenue annually between 2009 and 2013, so property tax cannot replace the pivotal role of land sales at the moment, added Chen.

It's worth noting that the Third Plenary Session of the 18th Central Committee of the Communist Party of China decided to expand the establishment of a property tax law and to promote tax reform when the time is right.

Like any reform, property tax reform will be a long-term project, and every decision made about it should be both prudent and progressive to avoid any market turbulence, Hu Zhigang, deputy head of China Real Estate and Housing Research Association was quoted as saying by Xinhua News Agency.

Imposing a new tax nationwide requires a legislative process - and this cannot be completed in a short time. Meanwhile, how one unifies the many and deeply divergent opinions about property tax will also need time, said Hu.

He said he believes the best choice for tax reform is to choose another one or two cities to extend the trial and to accelerate property tax law legislation.

Macdonald said it is possible that both Shanghai and Chongqing could begin taxing pre-owned houses in the coming years, but there are a number of obstacles to overcome.

"After more than a decade of prosperous development, the trade volume of new homes is accounting for a descending proportion of total home transactions. Therefore, if the property tax can extend to pre-owned homes at a higher rate, it will greatly help cool down speculative demand," said Zhou from Jones Lang LaSalle.

He also noted the actual property tax of Shanghai was a mere 0.5 percent of the purchase cost of a property every year (this cost doesn't change in spite of the soaring home prices year-on-year), but the average tax in the United States is between 1 and 2 percent of a property's yearly valuation price.

The property tax is not designed as a replacement for current government policies, but it is a tax designed to address certain imbalances in the property market and generate tax revenues for local governments to support local services and communities, Macdonald said.

While the implementation of the tax might have the effect of cooling the property market, this is of a secondary concern to the redressing of this imbalance in the market. While the consequent cooling of the market after implementation may encourage the government to loosen some of the other restrictions, it does not mean that this should be viewed as a replacement to existing regulations, he added.

"The strict execution of the central government policy on pre-owned home transactions could be more effective than a brand-new property tax," said Chen Jie from Shanghai University of Finance and Economics.

The central government announced on March 1, 2013, a levy of a 20 percent tax on gains on pre-owned house sales. Analysts regarded the policy as an effective measure to cool down speculative demand.

Meanwhile, Chen also suggested raising the tax on empty units that are not primary homes. Under the primary home system, owners of housing that is verified as a non-primary home would have to pay a large amount of tax every year for the property being empty.

"Homeowners will want to get rid of their empty housing as soon as possible once they realize the cost for stockpiling property will become very expensive," said Chen.

But Chen also said the levy of property taxes should not be a new burden for Chinese people. "There must be a relevant public financing system reform to make sure the tax collected is wisely spent in the best interests of the people."

Contact the writer at wang_ying@chinadaily.com.cn

(China Daily USA 02/19/2014 page13)