On August 17, 2021, Chinese President Xi Jinping proposed at the 10th meeting of the Central Committee for Financial and Economic Affairs that "property tax legislation and reform should be actively and steadily promoted, and pilot work should be well conducted". Since then, the process of introducing a property tax in China has accelerated significantly.

On October 23, 2021, the 31st Session of the Standing Committee of the 13th National People's Congress adopted a decision to authorize the State Council to pilot property tax reforms in certain regions (hereinafter referred to as the "Decision"). The specific contents of the Decision include: 1). The taxation objects of the property tax in the pilot regions are all types of residential, non-residential, and other real estates, not including lawfully held rural house sites and the residences thereon. Holders of the land use right and owners of buildings are the taxpayers of the property tax. The Interim Regulation of the People's Republic of China on property tax and the Interim Regulations of the People's Republic of China on Urban and Town Land Use Tax are to continue to be implemented for non-residential real estate. 2). The State Council is to formulate specific measures for the property tax pilots, and the local governments in the pilot regions are to formulate specific implementation rules. The State Council and its relevant departments as well as the local governments in the pilot regions shall establish scientific and feasible models and procedures for collection administration. 3). The State Council is to determine the pilot regions in accordance with the principles of being active and prudent, and by holistically considering such circumstances as deepening the pilots and enacting uniform legislation, as well as promoting the stable and healthy development of the real estate market; and is to file [the pilot regions] with the Standing Committee of the National People’s Congress for recording.

The Decision also states that the State Council will decide when to launch the pilot property tax. The period of the pilots authorized by the Decision is five years, starting on the date of issuance of the State Council's pilot measures. During the pilots, the State Council shall promptly sum up the experience of the pilots, and report to the Standing Committee of the National People's Congress on the status of the pilots six months before the expiration of the authorization period; where it is necessary to renew the authorization, the State Council may put forward relevant opinions, and the Standing Committee of the National People's Congress can make the relevant decision. Where the conditions are ripe, a law is to be promptly formulated.

Researchers from ANBOUND believe that the introduction of property tax is not only a major reform of China's fiscal and tax system, but also has a significant impact on the fiscal relationship between the central and local governments. It may also have a significant impact on China's economic system reform, land system reform, wealth redistribution, and the realization of common prosperity. However, from the perspective of tracking research, the issue of property tax is actually a topic that has been discussed for more than a decade. It has been ten years since the pilot property tax was launched in Shanghai and Chongqing in 2011 (on this basis, the pilot property tax to be carried out can be regarded as an expanded pilot). Many previous analyses have mentioned the central government's promotion of policy actions, therefore we will evaluate and highlight some key points from a research perspective.

According to the "Decision" of the National People's Congress, combined with the tracking research on the property tax reform, ANBOUND's researchers believe that the introduction of property tax is worth the focus of the market, government departments, and ordinary people in the following aspects:

First of all, to understand the property tax from the perspective of policy, we should understand two main points: (1) It is necessary to levy the property tax. It is a matter that should be done sooner or later, and related taxes should be planned long ago. However, due to the importance of the real estate industry to the national economy and ordinary people, the policy circle cannot make up its mind at that moment. Therefore, the property tax, which was delayed until today, is in fact a remedial work. Not only is there a lost opportunity to "rationalize" taxes, but there is also a lost opportunity to use them to balance economic growth with real estate development. (2) To control the reasonable progress and scale of property tax. The current fiscal demand for tax revenue growth continues to increase, and it is actually very difficult to control the reasonable scale of tax collection. Hence, special attention should be paid to getting things done, or at least not messing up. In short, it is crucial to control the reasonable progress and scale of property tax.

Secondly, the impact on the redistribution of wealth and common prosperity. Under the general goal of common prosperity, there will be many adjustments in wealth creation and distribution in China. In terms of wealth distribution, the secondary distribution and the tertiary distribution will be enhanced, and domestic individual income tax, inheritance tax, gift tax, property tax, and other taxes will continue to advance. In fact, the property tax is the secondary distribution of wealth in the household sector. Housing property of China’s domestic households can then be rebalanced and redistributed through compulsory taxation, which can restrain the "speculation" in its domestic real estate market to a certain extent and help realize the policy goal of "houses are for living in, not for speculation". However, it should be noted that given the high proportion of real estate in the wealth of Chinese households, the property tax has a wide impact on the wealth of households, so the tax system should be designed with careful consideration in terms of the taxable proportion and the levy. If the tax is not properly designed, it will become the exploitation of the household wealth in the country.

Third, the impact on the real estate industry and urbanization. There is no doubt that the property tax will have a general impact on the domestic real estate industry, but the impact is not a sudden and disruptive reversal. In fact, with the development of urbanization in China and the policy goal of "houses are for living in, not for speculation", the land economic model and incremental expansion of the real estate model have gradually weakened in the country, and the support of "land finance" to local governments has also begun to weaken, which determines the future development direction of the domestic real estate industry. Since the beginning of this year, a number of leading real estate enterprises have experienced a debt crisis, which has raised a warning to the traditional real estate development model. In the future, China's real estate industry will shift from an "incremental model" to a "stock model", and the mode of urban development will further shift from expansion to urban renewal. It should be pointed out that the introduction of property tax cannot be regarded as a "powerful tool" to reduce housing prices. There are many factors affecting housing prices, such as capital surplus, which is a strong driver for rising housing prices.

Fourth, the impact on the fiscal relationship between the central and local governments. The introduction of property tax is a reform to adjust the fiscal relationship between the central and local governments. Under the backdrop of the increasing fiscal pressure of the government and the far greater power of local affairs than its financial power, the fiscal contradictions between central and local governments are increasing. Judging from previous policy discussions, property tax revenue is more likely to attribute to local governments. The practice of property tax in other countries also shows that property tax is most appropriate to be collected and used by local governments, with residents paying property tax and enjoying public services commensurate with their tax burden. It is the most extensive practice so far that the property tax is "exclusively used by local administrative districts", and it is also the tax design with the highest motivation for local governments to collect and administer property tax and the highest willingness of residents to pay tax. However, the potential tax base of the property tax is the total value of the local real estate market, and the tax base varies greatly from place to place. If all the property tax is handed over to the local governments, the financial gap between local governments may be further widened. Therefore, it is a realistic policy issue whether the property tax revenue should be coordinated and adjusted among different levels of government.

Fifth, the timetable for levying property tax. The pilot property tax reform will last for five years, and it will take five years before it is officially enacted. If the pilots start in 2022, the property tax is expected to be legislated and levied nationwide in 2027, amidst the mid-period of the 15th Five-Year Plan. However, due to the complexity of the property tax, local governments at all levels, regardless of whether they are within the scope of the pilots, need to make relevant preparations within the next five years, especially to systematically ascertain the holders of the land use right and owners of buildings, to fully grasp local real estate-related information, and to form a set of a basic database with a unified national paradigm.

Sixth, the taxation objects of the property tax. According to the Decision, the taxation objects of the property tax in the pilot regions are all types of residential, non-residential, and other real estates, not including lawfully held rural house sites and the residences thereon. Holders of the land use right and owners of buildings are the taxpayers of the property tax. ANBOUND's researchers would like to remind that: (1) Rural house sites and the residences thereon are not within the scope of the property tax for the time being, so the introduction of property tax has nothing to do with rural areas for the time being; (2) The taxation of non-residential real estate will follow the existing property tax regulations. Therefore, the "increment" part of the future property tax revenue will mainly come from urban residential real estate.

Seventh, which regions will be selected as pilot regions? Strictly speaking, this is not a matter of analysis. It depends on the decisions of the State Council and local governments. Previously, there were several views in the market that suggested selecting some popular cities to pilot the property tax, such as Shenzhen, Qingdao, Chongqing, Urumqi, Xi'an, Dalian, Hangzhou, Jinan, Changsha, Xining, and other cities with the highest month-on-month increase in house prices. Some scholars also suggested that property tax reform could be piloted in Shenzhen, Hainan, and Zhejiang, as the three regions are currently the demonstration areas at the forefront of innovation. ANBOUND would also like to emphasize that, in the current context of the preparation for the introduction of property tax, the participation of local governments is very important. Whether local governments should "reform early" or "reform later" depends on the local government's judgment and choice between short-term and long-term interests.

Eighth, property tax rates and exemptions. This is a specific policy design issue, not a matter of strategy or idea. Internationally, property tax rates generally range from 0.5% to 3%. In 2011, Shanghai and Chongqing launched a pilot property tax. The pilot property tax in Shanghai is levied at 0.6% of the property's fair value. The tariff applies to non-residents, as well as residents who opt for a second new home. Chongqing levied a tax rate of 0.5% to 1.2% on luxury apartments and villas and second homes purchased by people without working hukou or investment. Considering the current situation in China, the introduction of the property tax should be premised on a wide range of exemptions. As for the scope and mode of exemptions, some empirical analysis suggests that the "per capita value exemption" is better than the "first home exemption" and "per capita area exemption" in terms of different income groups, the role of regulating income distribution and the difficulty of simplifying policy implementation, and it is also more in line with the characteristics of property tax as a capital levy.

Ninth, the introduction of property tax may highlight regional differences. ANBOUND would like to stress that the property tax is a symbol that China may be entering an era of "quality economic development", where incremental development and scale expansion are a thing of the past. Therefore, some "characteristic towns" may become "ruined towns" in the future, which may emerge at an unprecedented speed in both developed and underdeveloped regions. It is a possible outcome that we should be alert to. In addition, regions will show their comprehensive economic and city-based strength in the "quality economic development" era. Developed regions may receive more financial support from property taxes, while underdeveloped regions may continue to lack financial support, which will also widen the gap between regions.

Final analysis conclusion:

The introduction of property tax is not only an important step in the reform of China's fiscal and taxation system, but also a secondary distribution of national wealth by the state in the context of common prosperity. The next five years will be a critical period for the property tax pilot, and all regions need to be prepared for it. From now on, China will step into the property tax era.