The Elusive Fix for China’s Budget Crisis

Across China, many local governments are on the brink of insolvency. Some cities have reduced pay for civil servants. Cuts to municipal health insurance have triggered street protests.

Central government bailouts are a possibility to rescue cities from their deep budget problems, but China hasn’t turned to a source of revenue that would be an obvious option in other countries: property taxes.

In China, where the government owns the land, localities almost never tax homeowners to support services like schools. Cities rely instead on selling long-term leases to real estate developers. Revenue from these land sales has plunged in the past year.

Last month, after a decade-long effort that involved 100,000 workers, China’s central government said it had finally figured out who even owns 790 million apartments and other properties. That knowledge means officials in Beijing could start a nationwide property tax system. But they are not expected to do so quickly. The obstacles range from the technical (it would be complicated) to the economic (it would hurt homeowners at a delicate time for the housing market) to the political (it would expose government officials who own many homes.

The idea of introducing a property tax is not new. The Communist Party’s Central Committee, in many ways China’s highest decision-making body, resolved in 2003: “When conditions permit, a unified and standardized property tax will be levied on real estate.”

Many economists support a real estate tax, notably Lou Jiwei, a retired finance minister who remains an intellectual leader among China’s technocrats. “A real estate tax is the most suitable type of tax as a local tax, and should be piloted as soon as possible after the economy returns to normal growth,” he wrote in February.

Mao Zedong, the founder of Communist China, nationalized China’s land from the 1940s through the 1960s, seizing it from affluent families — who were killed in large numbers — and transferring ownership to the state. Since the 1980s, local governments have covered many of their costs for road construction, school operations and other activities by leasing large blocks of that land to developers.

Until last year, sales of land leases accounted for 7 percent of the Chinese economy. By comparison, the average for real estate taxes in the 38 industrialized democracies in the Organization for Economic Cooperation and Development is 1.9 percent.

The United States is particularly reliant on property taxes. Local governments collect 3 percent of the country’s gross domestic product each year through these taxes and spend much of it to pay for public schools.

For China, raising money through land leases worked well for a long time. But a slow-motion crash of the housing market has set off bond defaults by dozens of developers, who have been left struggling to finish apartment projects, much less to buy land for new ones.

Revenue from land sales over the last several decades has allowed China to keep other taxes low. Although China calls itself a socialist country, it has practically no taxes on investment gains, inheritances or personal wealth. National and local governments rely on a regressive combination of heavy sales taxes, salary taxes and business taxes, in addition to the land leases to developers.

What keeps China from imposing a property tax?

Public resistance to a property tax is strong. Apartment owners believe that real estate taxes should be the responsibility of the developers, who have already paid the government handsomely for the land to build housing.

“The general complaint is, ‘We have already paid so much for an apartment that there is no way we’re also going to pay a real estate tax,’ ” said Shitong Qiao, a Duke University law professor.

A further difficulty is that local officials, who are in charge of devising a real estate tax, have a lot to lose from one. A perk of civil service jobs has been the chance to buy apartments for little or nothing, particularly during the 1990s.

With some apartments in big cities selling for several million dollars, and with senior municipal officials earning only $30,000 or $40,000 a year, imposing a 1 percent annual tax could claim their entire incomes. A tax could also expose the wealth of officials who speculated in land.

Introducing a property tax could drive down housing prices at a time when construction in all but the largest cities is weak. Many homeowners are already worried about losing money on their apartments.

“The smaller cities have a greater need for property taxes to balance their budget deficits, but their housing markets are also not as strong as in the big cities,” said Zhu Ning, a professor at the Shanghai Advanced Institute of Finance.

What could China do to start taxing real estate?

Last year, the central government studied whether to introduce a “mansion tax” on the largest and fanciest apartments and houses in China, said two people familiar with China’s economic policymaking who insisted on anonymity because they were not authorized to discuss the subject publicly.

But a mansion tax has not advanced because of concern that it could damage already fragile confidence in the housing market, both of the people said.

A long-term option suggested by overseas experts like Professor Qiao is to require apartment owners to start paying taxes when the original land leases for their buildings expire.

A few early land leases after Mao’s death were for as little as 20 years, and have expired.

But most recent residential land leases have been for 70 years. Waiting decades to tax many apartments would not help China deal with its current fiscal crisis.

Jia Kang, a former finance ministry research director who still advises the ministry, said that completing the real estate registration system meant China was nonetheless making progress toward someday enacting a real estate tax.

“The unified registration of real estate is the most basic prerequisite for optimizing the management of the real estate market,” he said. “It will also play a role in supporting a future real estate tax.”

Li You contributed research.