Urban Property Taxation:

Some Reflections for China

Presented at the Center for China in the

World Economy, Beijing
October 16, 2004

Johannes F. Linn
The Brookings Institution
[email protected]

The Brookings Institution, Washington, D.C. www.brookings.edu

 The Questions
1. How important is revenue from property
taxation in urban public finance around the
world?
2. What are the pros and cons of property
transfer taxes versus other property
taxes?
3. Which type of property tax suits China
best?
4. How best to handle transition issues in
property tax reform?

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 Overview
1. The context: Links between urban land
use management and property taxation
2. Some basic aspects of, and experiences
with, urban property taxation
3. Pros and cons of property transfer
taxation versus capital value taxes, in
general and for China
4. Managing the transition in property tax
reform
5. Some tentative conclusions

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1. The Context: Links between Urban Land
Use Management and Property Taxation
• China has been facing a challenge of rapid urbanization.
• At heart of managing urban growth is the nexus between
urban land use management and urban public finance.
• Property taxation lies at the intersection between urban
land use management and urban public finance..

Property Taxation

Urban Land Use Urban Public

Management Finance

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 Urban Land Use Management

• Land is the scarce factor of production in

cities (aggravated in China by a perceived
scarcity of agricultural land).
• Effective management of urban land is key
to efficient and equitable growth of cities.
• This in turn requires that there is “a
coherent system of land use regulations,
infrastructure investments and land related
taxes.” (Bertaud and Malpezzi, 2004)

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 Urban Public Finance

• “China has the rare chance to ‘get it right’ by

establishing the rules of urban finance in an
economically rational way.” (Bird, 2004)
• This requires clear, effective decentralization of
expenditure responsibility and revenue authority to
city governments.
• The main potential local revenue sources are: user
charges for urban services, property taxation,
automotive taxes, and transfers.
• Big cities should be mostly self-financing.

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 Property Taxation is at the Core
• Property taxes result in incentives that affect urban
land use and land prices directly.
• Property taxes finance physical and social
infrastructure services, which in turn affect land use
and whose benefits are capitalized into property
values and hence the property tax base.
• As “benefit taxes” property taxes are a good
financing tool for decentralized, transparent,
accountable and equitable urban government.
• An effective urban land registry (cadastre) is
essential for urban land management and property
taxation.
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2. Some Basic Aspects of, and Experiences
with, Urban Property Taxation
• The basic types of property taxation: annual
value tax, capital value tax (CVT), site value
tax, property transfer tax, land value
increment tax Æ the world is moving to the
CVT
• Basic elements of property tax policy and
administration: base selection, identification
of property, valuation, rate setting, collection
and record keeping Æ a systemic approach
is needed.

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 Some Tough Choices in Property Tax
Policy and Administration
• Tax base: there are pros and cons for each option Æ
a tough tradeoff which depends on country/city
conditions, policy objectives and may change with
time.
• Identification: often difficult with unclear property
rights, demarcation, and titles.
• Valuation: difficult in practice, but a good cadastre has
important benefits for land use planning, land and
financial market development, other taxes.
• Rate setting: uniform or differentiated? flat or
progressive? how high, how low?
• Collection: in personam or in rem? how to enforce?
• Record keeping: consistent records are essential!
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 The Role of Property Taxes in Raising
Revenues
Property taxes are not necessarily a gold mine, and
require hard work and patience:
• They’re a small source of taxes at the country-
level (0.4% of GDP and 2% of total taxes in
developing countries (DCs), 1% and 4% for
OECD)
• They’re an important subnational revenue source
(20% in DCs, 40% of DC subnational taxes; 18%
and 35% for OECD)
• Property tax revenues increase with urbanization
and incomes (Bird and Slack, 2002), decentral-
ization and lower transfers (Bahl and Linn, 1992)
• Tax rates, assessment and collection ratios are
low in developing countries (Bahl and Linn, 1992)

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 Subnational Property Tax as Share of GDP
(percent)

1970’s 1980’s 1990’s

OECD Countries 1.24 1.31 1.44

(number of countries) (16) (18) (16)
Developing Countries 0.42 0.36 0.42
(number of countries) (20) (27) (23)
Transition Countries 0.34 0.59 0.54
(number of countries) (1) (4) (20)
All Countries 0.77 0.73 0.75
(number of countries) (37) (49) (58)

Source: Roy Bahl, “ The Property Tax in Developing Countries: Where are we in 2002?”
Land Lines (Lincoln Institute of Land Policy, Cambridge, MA, 2002. Calculated from data in IMF,
Government Finance Statistics Yearbook, 2001;
Quoted in Bird and Slack, 2002

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 Subnational Property Tax as Share of
Subnational Revenue
(percent)

1970’s 1980’s 1990’s

OECD Countries 17.4 17.0 17.9

(number of countries) (16) (17) (16)
Developing Countries 27.6 24.3 19.1
(number of countries) (21) (27) (24)
Transition Countries 6.7 8.51 8.8
(number of countries) (1) (4) (20)
All Countries 22.8 20.4 15.6
(number of countries) (38) (48) (59)

Source: Calculated by Roy Bahl and Bayar Tumennasan, Andrew Young School of Public Policy,
Georgia State University, from data in IMF Government Finance Statistics Yearbook, 2001
Quoted in Bird and Slack, 2002

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 3. Pros and Cons of Property Transfer
Taxation versus Capital Value Tax
Property transfer tax Capital Value Tax
• Pros: relatively easy to • Pros: large tax base
assess, collect; may keeps rates and hence
help reduce land prices distortions down;
• Cons: owner has reduces land prices;
incentive to hold reflects benefits of
property off market, changing urban
understate sales price; services over time
limited tax base • Cons: difficult to
requires high rates administer; may delay
development

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 China: Taxing Land Conversion?

“First tier land market” involves the sale of land use

rights (for 40-70 years) to private parties on
conversion of public land from rural to urban use
• Private “purchaser” should pay for the use right based on
its market value (this is not a tax!).
• Public “seller” (rural collective?) should receive that
payment.
• Farmers that had previously the use right should be
indemnified at least at fair rural use value.
• There is no need for a transfer tax or “fees.”
• Urban government should charge a property tax on all
urban land reflecting the cost/value of public services
provided.

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 China: Some Possible Issues with Land
Conversion
• With tight control over expansion of urban land,
scarcity premium on urban land can result in large
financial gains as conversions are selectively
allowed. (This is not uncommon also in Europe.)
• Property tax will reduce this premium since it
lowers the market value of the urban use right by
reducing expected future earnings stream.
• Transparent, competitive, arms-length process of
sale at conversion is essential.
• Two tracks of conversion (administrative transfer v.
first tier land market sale) may cause problems of
arbitrage/corruption.

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 China: Some Possible Issues with Urban
Property Taxation
• Capital value tax may be difficult to levy on a use-
right that is limited in time, since its value will
progressively decline to zero at expiration.
• Therefore, an annual value tax on presumptive
income/rent may be preferable (as in some other
countries with predominant lease hold property
rights).
• It will be important to clarify early what procedures
will be followed to renew use-rights upon expiration,
with a clear distinction drawn between the price of
use-right renewal and the recurrent property tax
before and after renewal.

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 4. Managing the Transition in Property
Tax Reform
• Start early: obligation of tax should be clear to use-
right holder when acquiring it
• Start simple and keep it simple (undifferentiated,
flat rates; no or few exemptions; uniform valuation).
• Apply the Chinese two-track approach in phasing
out the old and bringing in the new
(“grandfathering” acquired rights is one option).
• Experiment with pilots (a la cities of Novgorod, Tver
in Russia).
• Take a systemic approach, and be sure to invest in
a good cadastre (land registration, etc.).
• Educate the public on the new system and its
rationale.
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 5. Some Tentative Conclusions

• Property taxation has a potentially important role to

play in financing the growth of self-reliant, efficient
and equitable cities in China.
• The approach to property tax reform should be
experimental, gradual, adaptive to the country’s
special circumstances – in short, it should be
“Chinese style.”
• Invest early in a high-quality, transparent cadastre.
• An early review/revision of the “tier-one land
market” conversion process is advisable.

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 Thank you!

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