China is one of the few countries that does not levy a wide-base recurrent tax on residential properties, despite its rapid urbanisation in recent decades. Chinese municipal governments suffer from a relative scarcity of revenue sources to finance needed spending and they do not have autonomy over any major tax. A main source of revenues for Chinese municipal governments is public land leasing fees (OECD, 2017[1]). Nevertheless, due to the irregular and scarce nature of this source of revenue, it may not be sustainable to rely substantially on this revenue stream (Brys et al., 2013[2]). While the number of urban residents rises, the stock of available land for leasing decreases, shrinking the fiscal capacity of local governments to provide the level of public services that urbanisation demands. A recurrent tax on residential properties could be an alternative source of revenue that has the potential to overcome these difficulties, since it is regular, tends to grow with urbanisation and provides the necessary resources to finance local public services. According to the OECD Revenue Statistics and OECD Fiscal Decentralisation database, all OECD countries obtain some portion of their revenues from recurrent taxes on immovable properties, and on average, 88% of this revenue accrues to local governments. This revenue stream represents, on average, 40% of local government total consolidated revenues, usually covering more than all expenditure on housing and community amenities and public order and safety.

Aside from the benefits of increasing government funding, recurrent taxes on immovable property have additional features and purposes that set them apart from other taxes, which could benefit the Chinese tax system in many different ways. More specifically, recurrent taxes on immovable property are a versatile policy instrument that can have a role in the three main functions of the government: attainment of a less unequal distribution of income, maintenance of a stable economy and an efficient allocation of resources. First, due to property taxes’ relative inelasticity – taxpayers usually only modestly react to changes in tax policy because their tax base is immovable – they are considered to be relatively efficient and among the taxes that are least detrimental to economic growth, especially when levied on households (OECD, 2021[3]). Second, in the case of residential taxation, there is a close link between taxes paid and public services received, which follows from the benefit principle of taxation in public finance. Third, they are one of the taxes least prone to tax competition, since their burden can be capitalised in house prices. Fourth, they can be used as a policy instrument for property price stabilisation since they tend to reduce the volatility of house prices. Fifth and lastly, it is a relatively transparent tax, potentially improving government accountability, contrasting with land concession revenues, which is a source of revenue that is defined outside the process of establishing a budget.

It is common for property tax reforms to be accompanied by more encompassing reforms of the fiscal system and inter-governmental relations, such as changes on the size and distribution criteria of fiscal equalisation funds. That is because the introduction of a new local tax in the absence of changes in the inter-governmental transfer system is likely to exacerbate existing fiscal disparities. China is among the most decentralised countries in the world from an expenditure perspective and also among the ones with the largest vertical fiscal gaps (i.e. the difference between local spending and local own revenues). At a minimum, the introduction of recurrent taxes on immovable property may narrow the vertical fiscal gap and provide more fiscal autonomy to local jurisdictions.

Despite these benefits, introducing a recurrent property tax system is challenging, given that for a number of reasons recurrent property taxation is among the most unpopular type of taxes. First, the transparency and inelasticity of recurrent property taxes, while they improve accountability and efficiency, make the tax salient and difficult to avoid. Second, the presumptive nature of property taxes makes it prone to unfair value assessments, particularly when revaluations are rare, potentially leading to abrupt and substantially higher obligations. Third, different from most taxes, recurrent property taxes are not levied on income flows, but rather on a stock of a relatively illiquid asset and, thus, can generate liquidity problems for households facing financial difficulties, in particular for asset-rich income-poor households, which are common in rapidly developing economies and regions. Fourth, the redistributive effect of recurrent property taxation hinges on various factors, but overall such taxes are typically less progressive than the personal income tax, inheritance tax and wealth tax. For these reasons, recurrent property reforms may face especially strong public opposition, adding to the typical difficulties of reforming tax systems (e.g. transitional costs, timing, impact on different levels of government, etc.).

Recurrent property taxes are considered among the most challenging taxes to administer, and require a well-functioning property valuation, billing and appeal system. The way that these processes are managed can have a significant impact on administration costs, which can be, as a share of tax revenues, as high as 10% (Almy, 2014[4]) or as low as 1% or less (e.g. in some US states).1 Moreover, since recurrent property taxes are commonly managed at the local level, multiple jurisdictions may administer these taxes differently and sometimes inconsistently, especially because of asymmetries in local administrative capacity, creating horizontal distortions. China is a large and heterogeneous country and might be prone to this risk.

Although there are major challenges in designing, reforming and managing a recurrent property tax system, it is possible to overcome these in a manner that allows society to reap benefits in terms of a better allocation of resources, more stable house prices and a fairer income distribution. Many successful recurrent property tax reforms were implemented by OECD and partner countries in the last decades, especially after the 2008-09 Global Financial Crisis. This report highlights many of these cases. Some reforms were more comprehensive and disruptive, involving the introduction of new recurrent property tax systems nearly from scratch, whereas others were more incremental, approaching specific features of ownership classification, valuation methods or local government autonomy issues (see Box 0.1 for a sample of the most recent property tax reforms).

This report presents a set of good principles and options for reforming recurrent taxes on immovable property based on the latest experience of property tax reforms around the world that are particularly relevant to the Chinese context. Although these good principles are mostly general, meaning that they can apply to almost any country, the report makes specific points tailored to the Chinese case. The report is divided into four chapters. The first chapter focuses on the role of property taxes in OECD countries; the second chapter discusses good principles for recurrent property tax design; the third discusses good practices on recurrent property taxes administration. Together, the second and third chapters provide the ‘end-goal’ of a reform, covering topics such as its integration into the tax system, tax rate, scope, valuation of properties and fiscal cadastre management. The fourth and last chapter provides principles to lay out a reform that can successfully overcome the general difficulties in any tax reform, such as transitional costs and communication issues, and the specific difficulties in property tax reforms, such as how to deal with its salience, liquidity constraints, perceived regressivity, inherently arbitrary tax base and lack of sensitivity to economic activity. Box 0.2, below, provides a summary of the main findings.


[4] Almy, R. (2014), “Valuation and Assessment of Immovable Property”, OECD Working Papers on Fiscal Federalism, No. 19, OECD Publishing, Paris, https://dx.doi.org/10.1787/5jz5pzvr28hk-en.

[2] Brys, B. et al. (2013), “Tax Policy and Tax Reform in the People’s Republic of China”, OECD Taxation Working Papers, No. 18, OECD Publishing, Paris, https://dx.doi.org/10.1787/5k40l4dlmnzw-en.

[10] OECD (2021), A Review of Local Government Finance in Israel: Reforming the Arnona System, OECD Multi-level Governance Studies, OECD Publishing, Paris, https://dx.doi.org/10.1787/a5bc4d25-en.

[3] OECD (2021), Brick by Brick: Building Better Housing Policies, OECD Publishing, Paris, https://dx.doi.org/10.1787/b453b043-en.

[9] OECD (2020), Tax Policy Reforms 2020: OECD and Selected Partner Economies, OECD Publishing, Paris, https://dx.doi.org/10.1787/7af51916-en.

[8] OECD (2019), Tax Policy Reforms 2019: OECD and Selected Partner Economies, OECD Publishing, Paris, https://dx.doi.org/10.1787/da56c295-en.

[7] OECD (2018), Tax Policy Reforms 2018: OECD and Selected Partner Economies, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264304468-en.

[1] OECD (2017), OECD Economic Surveys: China 2017, OECD Publishing, Paris, https://dx.doi.org/10.1787/eco_surveys-chn-2017-en.

[6] OECD (2017), Tax Policy Reforms 2017: OECD and Selected Partner Economies, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264279919-en.

[5] OECD (2016), Tax Policy Reforms in the OECD 2016, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264260399-en.


← 1. For more, see Walters and IAAO Research Committee (2014).

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