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Homes in Shanghai’s Puxi district were included in the Chinese government’s pilot project in property taxation, initiated three years ago in an effort to lower housing prices and reduce speculation.

Carlos Barria

For years, Chinese property owners have enjoyed a free ride to wealth driven by scorching growth in home prices and a lack of property taxes to whittle away the gains. A condo in Beijing has been like a piece of gold: an asset that can sit and gain value, with little cost of ownership.

But three years ago, Chinese authorities began taxing a small fraction of the country's real estate, with pilot projects in two major urban areas, Shanghai and Chongqing.

Now Chinese authorities say they are moving to rapidly roll out property taxes nationwide, in a bid to reshape the country's financial structure and curb some of the incentives for local governments to trammel the rights of farmers and others left behind by China's extraordinary wealth gains.

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Last week, China's state-owned People's Daily newspaper said the country "is likely to introduce a nationwide property tax as early as next year." Citing officials with the National People's Congress, China's rubber-stamp legislature, it said a draft law will be completed this year.

Several experts reached by the Globe and Mail cast doubt on the timeline, saying so much work remains to be done that a full rollout may take several years; next year may merely bring more trial cities.

But it is clear China is moving with some haste to bring forward a new tax regime that stands to upend the way cities work.

Today, Chinese cities depend on the sale of property rights to developers for much of their income. But that income is unstable – since it depends on demand among developers – and creates many problems. Among the most visible is the conflict it creates between municipalities and people who own houses and farmland, which are often appropriated by municipalities hungry for money. There is another problem: it's a revenue model with a shelf life.

"The sustainability of municipal finances based on land sales – whether it's 25 or 40 per cent of municipal revenues – that model is limited by the very fact that land is limited," said Michael Klibaner, head of greater China research for Jones Lang LaSalle Limited, a commercial real estate information provider.

The current system also creates distortions, such as encouraging the creation of commercial property – which does generate property taxes today – in favour of residential housing, which does not.

Mr. Klibaner believes a China-wide residential property tax is "inevitable." But he points to the lack of a proper registration database as one reason it may take some time. In many cities, individual districts maintain independent property registries that cannot talk to each other. Some may even be paper-based. The lack of national database standards on basic data, like who owns which property, is an obstacle that will likely take some time to resolve.

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There are other problems. Historically speaking, property taxes are not new to China. As far back as the late 12th century, China's Chin Dynasty charged a land tax that exacted three litres of grain per year for every 665 square metres of land, and a property tax paid in strings of coins. But property taxes largely disappeared when Mao Zedong and the Communists took control of China in 1949 and nationalized its assets. Chinese citizens have grown unaccustomed to the idea, using second and third properties as fee-free savings accounts. They "really don't understand this kind of tax," said Ren Qiang, an associate professor at Beijing's Central University of Finance and Economics.

Another reason for Chinese leadership to take it slowly: The question of which taxes go to pay for local bridges and street-sweeping is surprisingly important. Hand that responsibility to a local government, and suddenly the people collecting and spending taxes are far closer to those doing the paying.

"With regular, constant oversight from local residents, accountability of local officials is set up to taxpayers, not to bosses in the higher level governments," Mr. Ren and a pair of other researchers wrote in an academic article last year. "More public choice in local services plants the seed for direct election of top local officials."

China "needs this kind of tax," Mr. Ren said.

It wants it, too, as a way to constrain exploding property prices that have made large cities, and even many smaller ones, unaffordable to all but the wealthy. "One of the goals is to lower housing prices, and also to reduce speculation," said Li Zhanjun, a researcher with the Shanghai-based E-House China R&D Institute.

But that depends, in part, on the way it's put together. In Taiwan, for instance, the system is so prone to manipulation that the owner of a $1-million (U.S.) house is unlikely to pay more than $500 a year in property tax. In Shanghai and Chongqing, the regulations were carefully written to affect only the very wealthiest with the most expansive property holdings. By some estimations, only a few thousand people actually pay property tax in Shanghai, a city of 24.5 million.

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"The trials in the two cities have failed," Mr. Li said.

Still, even some homeowners say they are willing to accept a higher tax burden if it means living in cities with more accountable government and better municipal services.

Today, "many of those living in communities are, like us, not satisfied with the service we're getting," said Peter Hu, who owns two homes in Shanghai. "The money they collect should serve us – improve traffic and improve peoples' lives."

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