(Bloomberg Opinion) -- The swell of talk about China implementing a property tax has resurfaced – again. But unlike past years, there’s growing certainty that it’s actually coming. Just not anytime soon.
Late last week, shares of Chinese real-estate developers tanked after Li Zhanshu, chairman of the National People’s Congress standing committee, said delegates will “focus energy” on drafting a property-tax law, among more than a dozen pieces of major legislation. Premier Li Keqiang also raised the issue recently, echoing President Xi Jinping’s now-famous maxim that housing is for investment, not speculation.
Investors were right to brush this off quickly, and shares have largely recovered since. A property tax, while sorely needed, faces serious practical hurdles.
First, there’s little incentive for local governments to comply. Municipalities rake in 4 trillion yuan ($596 billion) annually from land sales, according to Citigroup Inc. Property-tax revenues will hardly make up the difference: A levy of 0.5 percent on property values would raise just 874 billion yuan, the bank estimates. Even at 1 percent, the government would be lucky to get 1 trillion yuan in revenue, says David Hong, research director at E-House (China) Enterprise Holdings Ltd. That would make property purchases increasingly unaffordable for people in third- and fourth-tier cities, where apartments tend to be bigger.
Logistically speaking, it could take years to get assessments on more than 100 million homes, assuming records can be found for thousands of ancestral residences. Of the roughly 5,000 valuation firms registered in China, just about 300 are qualified to work in tier-1 cities, according to Citi. Local governments would also have to shell out for tax collectors and accountants. Why go through all this trouble when municipalities can simply pocket 50 percent to 60 percent of the proceeds from land sales?
Then there are personal disincentives. Many local-government officials are reputed to own multiple properties. If and when the tax proposal gets passed, it’s broadly expected that second (and third, and fourth) homes would face a higher levy than primary residences.
Needless to say, raising taxes in a slowing economy is a tricky maneuver: A slump in 2014 derailed a previous iteration of this plan. Chinese citizens put nearly three-quarters of their savings toward housing, compared with 35 percent in the U.S., so any increase will pinch. With capital controls making it tougher to move wealth overseas, property remains one of the few appealing investment options.
Real estate accounts for as much as a quarter of GDP, once you throw in construction and furniture sales, and the sector is showing signs of strain. While prices are rising overall, some cities have posted declines. Developers are struggling, with China Evergrande Group, one of the country’s biggest, posting a 43 percent slump in sales in the first two months of the year, and China Jinmao Holdings Group Ltd. a drop of 40 percent, E-House’s Hong estimates.
Given all the hurdles, the slow progress makes sense. Despite coming up consistently at Communist Party conclaves since 2015, proposals to implement a property tax have never passed the draft stage or gone up for a vote, according to analysts at China International Capital Corp.
There is nevertheless a sound argument for imposing a property levy, particularly now that the government faces a $300 billion hole from a slew of recent tax cuts. China doesn't currently tax owners on the value of their properties, except in Shanghai and Chongqing – and even there, it’s limited to luxury homes or multiple properties. Encouraging municipalities to diversify their revenue bases is also a good idea. Their overreliance on land sales only adds helium to an already lofty property market.
With Beijing keen to get this done, it’s looking like legislation could get passed by 2023. But that’s just the first step. Rolling out a property tax could be a decade away. The tax man cometh, in his own sweet time.
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Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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