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City may soon roll out China's first property tax

January 10, 2011 |  6:22 am

Chinese cityChongqing, a sprawling southwestern municipality in China about the size of Maine, may soon introduce the nation’s first property tax.

The plan, which was reported in state media Sunday, would be aimed at high-end housing, seen as driving increasingly unaffordable property prices.

The report said the tax could be unveiled in the next three months but did not describe how the plan would work or what would be considered high-end housing. It is assumed any levy would resemble monthly property taxes in the U.S.

Policymakers have long been toying with the idea of a property tax in various major cities to help rein in runaway prices, one of the chief complaints among ordinary Chinese.

The challenge has always been how to do it. Cities would have to build from scratch a database of ownership and housing values. (Think of all the government officials who would be exposed for owning too much property, critics say.)

It’s already commonly believed that buyers of second-hand homes understate the price of their properties to reduce the cost of the transaction tax -- a one-time fee that is different from the proposed tax.

Still, the call to reform the financial structure of the industry has been growing louder. Cooling measures such as higher down payments and restrictions on purchasing multiple homes have so far failed to bring housing costs back down to earth. An index of 70 cities in China showed housing prices rising three months in a row in November.

Experts say property taxes could reduce the reliance local governments place on land transfer fees to developers to generate revenue. Until then, cities have every incentive to drive up the cost of land, which ultimately drives up the cost for consumers.

A property tax also would discourage speculators from buying apartments and leaving them empty. That  phenomenon also is blamed for driving up property prices and has become a symbol of the growing wealth divide in China.

The risk remains of a property tax stifling a sector of China’s economy that is responsible for up to a fifth of gross domestic product. Real estate also has been a refuge for investors flush with cash hedging against China’s rising inflation.

Other cities that have been rumored to be considering property taxes are Beijing, Shanghai and Shenzhen.

Chongqing, home to 32 million people, saw its residential property prices grow 37.9% in 2010, according to the real estate tracking website (link in Chinese).

-- David Pierson

Photo: Two women look over buildings under construction in Chongqing, China. Credit: Getty Images