South China Morning Post
EDT13 | EDT | Gaixin View | By Edited by Hu Shuli
With the property market heating up again, there are signs that the central government will soon roll out property tax reform in a pilot scheme. The reform, which has been years in the planning, is critical to improving land management and public finances in the cities. As such, it must be well thought-out, and carefully implemented along with other complementary measures. It must not be treated as an expedient means to cool the property market.
Clearly, there are worries that the hefty investment into the debate and plans for reform would end in unexpected catastrophe.
The third plenary session of the Communist Party’s 16th Central Committee, held in 2003, first proposed that the government should impose a tax on property, while removing the corresponding charges and fees. Scholars then studied the experiences of other countries for ways to carry out such a reform on the mainland.
It became clear that a too-rapid rise in land prices as a result of urbanisation would be highly undesirable, and that a property tax could help narrow the differences between the prices of farm and non-farm land, thereby reducing the corruption that often came with huge price differences. The tax could also become a stable, long-term source of income for local governments.
Given its significance and impact, reform should be undertaken with prudence. But the pilot project should be introduced quickly and decisively.
At the same time, the government must promote market reform for agricultural land, clearly define property rights and lay the groundwork for the new levy. It must help the people better understand the issues that would, after all, affect their interests, and the interests of society at large.
In 2005, I organised a debate on the issue with a panel of experts, and I remember the fierce arguments. Five years on, we are still debating the issue; preparations for a property tax are going slowly, as is the market reform for farmland. The result is soaring home prices which, since they have become a source of funds for local governments, have led to worsening corruption and fed public resentment. The government must make up for its inaction so far by quickly introducing the pilot programme.
With ever louder public grouses over a shortage of affordable housing and skyrocketing housing prices, social resentment is simmering. The launch of a property tax would be timely, given that the resistance to reform is likely to be lower than usual. Meanwhile, the government should carry out a systematic revamp to sort out the tangle of vested interests before expanding property tax reform to the rest of the country.
The government should undertake the following measures to complement property tax reform:
First, it must balance the interests of all parties involved. A concise, complete and transparent inventory of real estate should be compiled, and a national database of personal residential property set up as soon as possible. This involves clarifying property ownership and ensuring open access to such information. The database would serve as a vital reference for market regulation, and a starting point for further reforms. The pilot programme should work out in detail the ways to set up a database for different kinds of housing, an assessment system, the framework for the property tax and procedures for handling tax revenue.
Second, existing real estate charges should be reviewed so as not to increase the overall tax burden on the public. The existing property tax, and taxes for urban and rural land use, should be absorbed into a unified and simple tax structure.
Third, the government must strengthen its supervision of tax collection. Taxpayers must be clearly identified, and vulnerable groups protected from an unfair tax burden. Experiences in other countries show that a property tax by itself cannot curb the rise of housing prices, and may even push prices and rents up. Will a revamped tax regulatory system be strong enough to ensure rules for property identification, assessment and tax collection are adhered to? The reform blueprint must address such concerns.
Finally, any reform must heed the principle of from the people, for the people. The property tax goes to local government coffers and as such must contribute to decentralised, transparent, accountable and fair local governance. Local officials should also take the opportunity to revamp their overall revenue structure, and ensure that their decision-making system is open and transparent, and their supervisory system robust. The tax proceeds should be used for the public good – to build welfare housing and repay debts owed to the people, for a start.
The pilot scheme should conform to the spirit of the reform. The new tax will bring major change to land management and public finance practices. Thus, it is only right that taxpayers are told what tax rates to expect, and campaigns are mounted to publicise the intent and details of the new system. In this way, reform will be carried out in accordance with the democratic principle of checks and balances, with the public’s support.
The property tax reform is meant to improve land management, and ultimately form the foundation for market reform that will culminate in a government-led land leasing and approval system. This end target should be spelled out.
As for the implementation of the property tax reform, the following principles are commonly understood to be critical to its success: a broad tax base, fewer exemptions, standard tax rates and easy collection of taxes. These are also the benchmarks by which we can judge whether the introduction of reform has been prudent, and subsequent progress made.
Let the people keep track of its progress, so that they can ensure that this important reform is carried out for the benefit of the majority.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. http://www.caing.com Copyright (c) 2010. South China Morning Post Publishers Ltd. All rights reserved.