Editor's note: On October 23, the 31st session of the Standing Committee of the 13th National People's Congress decided to authorize the State Council to carry out pilot real estate tax reform in some areas for a period of five years (source: Xinhua News Agency). Property tax has always attracted much attention and expectations, so I recommend the following articles to facilitate the understanding of property tax and real estate.
First, real estate taxes are not equal to property taxes. Real estate tax is a general term for all taxes related to real estate, including real estate value-added tax, income tax, land use tax, deed tax, etc. Property tax refers to the property tax levied on the owner of the property of a house. The official use of "real estate tax", which may also be considered also includes "land use rights holders", is not exactly the owner of the property. However, this article is used to using the concept of "property tax".
Can property taxes reverse the huge inertia of land finances?
How much does it cost us to switch between the systems?
How does the U.S. transition from land finances to real estate taxes?
This article understands land finance and property taxes from the perspective of the evolution of property taxes in the United States.
This article is logical
The American Way: From Land Finance to panic to homestead law
Second, the road to China: from the tax-sharing system to land finance, and then to the real estate tax
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The American Way
From land finances to the Great Panic to the Homestead Act
In 1776, the North American war against Britain was won, and the thirteen North American colonies officially became the United States of America.
Due to the issuance of a large number of national bonds during the War of Independence, the repayment of debts and interest occupied most of the national budget, the national treasury was seriously short, the financial revenue was not enough, and the federal credit was on the verge of collapse. In 1785 and 1787, Congress issued the Decree on the Survey and Sale of Land in the West and the Decree on the Northwest. Both laws stipulate that the proceeds from the sale of public land "shall be used to repay debts or to perform debt service operations ... and only for such uses". Based on this, in 1790 the federal government collected the war debts of the local states and promised to repay all the debts.
However, since the United States is a country founded on "private property rights", most of the land is in private hands, and the number of state-owned land that can be sold is very limited. Therefore, it was difficult to sell land to repay debts at first. But then, a fortuitous event caused the U.S. national fortune to take a turn for the better.
A gift from Napoleon
A louisiana land finance road
During the Jefferson presidency, Napoleon of France took the louisiana colony from Spain and took control of the port of New Orleans, which was equivalent to curbing the outlet of the Mississippi River in the United States.
So President Jefferson sent Ambassadors Leviton and Monroe to negotiate with Napoleon to try to buy the port of New Orleans and the surrounding land. What Jefferson did not expect was that after a year of negotiations, Napoleon, who had no concessions, decided to sell the entire Louisiana area, including New Orleans, to the United States for $15 million.
It turned out that Napoleon was determined to go to war with England at this time and had no time to take care of North America, and if he sold this land, it would be enough to raise funds for the war, and at the same time, he also sold his personal feelings to the United States.
At first, Jefferson ordered the purchase of New Orleans for two million dollars, while the entire Louisiana area (2.14 million square kilometers) was equivalent to hundreds of New Orleans, but it was only $15 million, equivalent to $7 per square kilometer, about 3 cents per acre. The two ambassadors immediately finalized the purchase of land after understanding Napoleon's calculations, and signed a land purchase treaty with France in April 1803.
In order to pay for the purchase of land, the federal government borrowed a lot of money from foreign banks, and the government's financial burden was further aggravated. So the federal government decided to revitalize the vast expanse of Louisiana and start a large-scale land sale model to pay off the increasingly urgent and huge debts.
The following year, Jefferson sent Lewis and Clark to team up and enter the Louisiana area for strategic exploration, drawing detailed maps of mountainous landforms and mineral resources, as well as mapping Spanish and French military forts and Native American areas.
Two years later, U.S. federal troops entered the area to conduct "persuasion education" and "targeted demolition" of native Indians. Next, the U.S. federal government began a massive auction of land in the Louisiana area. According to the land policy formulated by President Jefferson since he came to power, the minimum purchase of land is 160 acres, the price is 1.64 US dollars, and the buyer can also obtain a certain loan.
This has attracted a large number of land speculators to snap up. Speculators acquire large plots of land, cut it into smaller pieces, and sell it to home buyers. Subsequently, a large number of eastern immigrants and European immigrants entered Louisiana to invest in real estate. In this way, the vigorous westward expansion movement opened up the American dream in the hearts of new immigrants. The ancestors of many wealthy Families in the United States today are these new immigrants.
Of course, the biggest beneficiary is the U.S. federal government. The U.S. government stipulates that newly expanded lands other than the founding thirteen states and lands of newly added states are owned, administered, and controlled by the federal government. In addition to land finance, politics was also one of the driving forces of the westward expansion movement. The Jeffersonians reduced the western state to an agricultural state, expanding the faction's voting power in Congress.
After that, the United States continued to expand its territory, taking Florida from Spain, forcing Britain to sign a contract to extend the territory to the Atlantic coast, buying 950,000 square miles of Mexican land after the Mexican-American War, extending the national border to the east coast of the Pacific Ocean, and controlling the California gold mines. By 1853, the United States was 3.03 million square miles, more than seven times more than the territory it had when independence was declared.
In this way, the federal government acquired a large amount of territorial dominance and obtained a huge transfer fee by auctioning off land. At that time, the largest source of revenue for the federal treasury was tariffs, and the second largest was land transfers. This was the early land finances of the United States.
By 1837, the federal government had finally paid off all its debts, and there was still a large surplus in the treasury, consolidating the federal treasury and the state credit.
The Great American Panic of 1937
A property speculation bubble driven by land finance
Driven by land finance, a large amount of money poured into real estate, railways and other fields, at the same time, the government promulgated and implemented the free banking law (the minimum capital for setting up a bank was reduced to $100,000), a large number of commercial banks rose rapidly, and provided a large amount of credit, real estate prices rose wildly, and market speculation tended to get out of control.
Russ Tweed vividly documents this panic crisis in his book The Inescapable Economic Cycle [1]:
"In 1832 it was only $59 million, and by 1836 it had soared to $1.4 billion... A lot of liquidity is created by those newly opened banks... The money is not invested in new industries, and most of it goes into real estate for speculation. ”
"The prices for everything in New York are ridiculously high... The rapid rise in real estate prices is not limited to one place in New York; the value of land in Chicago has risen from $1.56 million in 1833 to no less than $10 million in 1836. ”
In order to resolve the increasingly extreme contradictions between man and land and curb crazy speculation, the federal government continued to reduce the area of the starting point of the single land auction, from 20,480 acres in the Land Ordinance of 1785 to 640 acres in 1796, to 160 acres in 1804, and to 40 acres in 1832.
In July 1836, President Jackson, who was extremely distrustful of paper money and abhorred speculation, signed the Mint Order, which stipulated that most land purchases must be paid for in gold or silver. Jackson hopes to curb real estate speculation across the country.
At this point, the federal government had a surplus, and Congress voted to distribute the surplus to the states. According to the resolution, beginning on January 2, 1837, the Federal Treasury department withdrew $9 million from major banks in New York every 3 months, and then distributed the money to the states.
This decree and the Treasury's practice of extracting precious metals amounted to a direct drain from the market's liquidity, and the real estate and banking markets immediately fell into tightness.
When the Federal Treasury withdrew the first $9 million, it toppled the first domino, followed by panic and a series of bankruptcies, real estate entered a vicious circle of crazy selling, a large number of banks collapsed due to runs, at the end of 1837, all banks in the United States stopped paying gold coins, the stock market fell sharply, 90% of the factories in the United States were shut down, and a large number of workers lost their jobs. This is known as the "Great American Panic of 1837."
"A piece of land in Chicago, which sold for $110,000 in 1836, continues to fall, and by 1840 it can be sold for $100. As land prices fell, speculators who bought large tracts of land and divided it into smaller plots of land hoarded up began to realize that there were no follow-up buyers. ”
This panic lasted a long time, plummeting from 1837 until 1842, five years after the crisis, when most of the country's housing prices finally fell to the bottom.
An editorial in the Herald of March 1837 read:
"The United States has never been in such a dangerous situation as it is now. We are now surrounded by a commercial panic that is making a great threat to destroy everything in our society — to destroy our entire fabric, to turn large areas into ruins, to wipe half of our banking institutions off the ground, to ignite the most impetuous passions, and to create mutations that will ultimately bring our country to a standstill. ”
《Residential Land Act》
A decree ending the history of the federal land finances
The Great Panic led to a collapse in real estate prices across the United States, market transactions almost came to a standstill, many people lost land and property, a large amount of land was abandoned, there were rotten buildings and construction sites everywhere, and infrastructure and land development were in a state of stagnation.
In order to activate the land market, the US federal government issued and implemented a series of decrees [2]:
In 1841, the United States enacted the Act of Pre-emption, which was intended to give settlers who had appropriated and improved state-owned land the right to purchase state-owned land preferentially at a low price without competition. This decree gave settlers the right (at low prices) to occupy state-owned land and gave birth to the Subsequent Homestead Act.
In 1854, the United States Congress passed the Diminishing Land Price Act, which stipulates that for land that has not been sold for many years, a new listing price is re-examined according to the rules inversely proportional to its listing time, and the longer the listing time, the lower the sale price. According to statistics, according to this decree, the United States sold a total of 26 million acres of land, with an average price of $0.32 per acre. The act was a transition to the free provision of homestead land to settlers in the Western Region thereafter, facilitating the development of the Western Region and the acquisition of land by ordinary settlers.
The American Civil War broke out in 1861. The following year, just as the war was raging, President Lincoln enacted the Homestead Act.
The Homestead Act provides that any citizen of the United States whose head of family or who has attained the age of 21 who has never participated in the rebellion may register for a total of not more than 160 acres (1 acre = 0.40 hectares) of homestead land after swearing to acquire land for the purpose of reclamation and paying a fee of $10, and the registrant who has lived on the homestead and has farmed for 5 years may obtain a land license to become the owner of the homestead.
This decree was promulgated out of the needs of war, hoping to gain the support of the broad masses of the middle and lower classes of the people and ensure the supply of military power. But the war-driven law, which effectively distributed much of the state-owned land to new immigrants in a near-free manner, put an end to the history of federal land finances in the United States. From 1862 to 1900, at least six hundred thousand families who moved into the Western United States benefited from it. As long as the black slaves helped the northern army to fight, they could obtain a certain amount of land and become free people with property.
In 1837, Congress voted to transfer the fiscal surplus to the local states. As a result, the federal government lacks direct incentive to acquire land finances. After the Homestead Law promoted the privatization of land, local governments also lost the conditions to seize land finances. It can be seen that land privatization is the key to ending the US land finance.
After that, the federal government and local governments optimize fiscal decentralization, and local governments have certain tax powers and expenditure responsibilities, and can independently determine the scale and structure of their budget expenditures. Driven by financial pressure, local governments have gradually shifted from the transfer of real estate to the collection of taxes on ownership, and the real estate tax has also been born.
Immovable property tax
An important tax system that relates to the level of local income and welfare
As early as 1818, the U.S. state of Illinois began to implement a general property tax system, which imposed the same tax rate on all kinds of movable and immovable property.
After the End of the Civil War, in order to overcome the prevailing financial crisis, the state governments began to introduce real estate taxes, which taxed houses and land.
In the early twentieth century, with the acceleration of urbanization in the United States, states and local governments gradually launched a series of tax reforms and balancing policies to solve the problem of public expenditure, opening the first round of real estate tax system changes. On the one hand, tax relief policies for low-income families and the elderly are introduced, and on the other hand, real estate taxes are levied on high-income people who own real estate.
In the 1970s, the US states once again introduced new property tax policies on a large scale, opening the second round of institutional changes in property taxes. The most influential of these periods was California's Proposition No. 13 of 1978, which included taxable house price adjustments, transaction reductions and double taxation, tax growth restrictions, etc., providing a blueprint for other states to restructure their property tax systems.
Today, the United States has formed a relatively complete real estate tax system. The real estate tax in the United States is levied on land, real estate and buildings, and the specific tax rates and preferential policies are formulated by the state and municipal governments according to the budgets at all levels. The U.S. real estate tax is a typical local tax system, which is implemented by federal and state legislation and local governments, with the purpose of providing sustained and reliable fiscal revenue for states and local governments, so as to provide stable financial support for local urban public goods, mainly for providing public services such as fire protection, public security, road traffic, education, and environmental improvement.
Real estate taxes have now become a major source of revenue for local governments in the United States, especially county-level governments. According to the U.S. Bureau of Statistics' 2015 statistical report, real estate taxes account for about 75 percent of local property tax revenues. For local governments such as counties, towns, and special zones, the proportion of property taxes is relatively high, mainly between 50% and 75%, of which special zones are as high as about 95%, almost all of which rely on property taxes [3].
In the U.S. local fiscal system, real estate taxes have a clear tendency to strengthen. According to the U.S. Bureau of Statistics, real estate taxes have been increasing as a source of tax revenues for local governments since 2002, accounting for about 50 percent of total fiscal revenues after excluding federal and state transfer payment revenues. In New Jersey and Mississippi, property tax revenue accounted for more than 90 percent of total revenue in 2015.
At present, 51 states in the United States have introduced real estate taxes on the ownership of real estate. The tax rate is determined according to the principle of "fixed income according to needs", which varies greatly from place to place, and is generally distributed in the range of 0.2% to 2.5% [4].
The real estate tax has become the second largest spending by U.S. residents on residential consumption, accounting for about 3% of household income. According to data from the U.S. Community Survey conducted by the U.S. Census Bureau, the median (in annual estimates) of average household property tax expenditures in all states rose from $1,838 in 2007 to $2,340 in 2016, and its share of the nation's median household income gradually climbed from 3.66 percent to 3.96 percent. Households in New York and its surrounding New Jersey pay the highest property taxes, with a median of more than $7,000, while states such as Mississippi and Alabama have the lowest, at less than $1,000.
The Road to China
From the reform of the tax-sharing system to the land finance to the property tax
From the history of the United States, we can draw at least the following two conclusions:
Property taxes may not be able to save a country, but land finances are not conducive to economic growth.
Land finance is an urgent means for a country to save the financial crisis and build national credit in extraordinary times, such as the early days of the founding of the country, and the debts are like mountains. But that's about it.
If, like in the early days of the United States, a subject controlled most of the land and used it to finance huge amounts of income, it would lead to three major problems: first, the emergence of land monopoly rents - land fiscalization, fiscal monetization; second, land resource mismatch, reduce land utilization, and form a man-made market monopoly; third, money and bank credit are easy to get out of control, asset bubbles are inflated, and debt is high.
The real estate bubble under the U.S. land finance in 1837 triggered a great panic, ending this more than 30-year land finance feast and leaving a tragic historical lesson. After the housing bubble burst, the economy fell into a prolonged depression. It wasn't until 11 years later, in 1848, that gold was discovered in California that the overall economy began to improve and real estate recovered.
Land finance is an unsustainable form of overdraft, while property taxes are a long-term mechanism.
Generally speaking, when the economy is developing in a big way and real estate is under development, the government is easy to rely on land finance and indirect taxes, and huge fiscal revenue can be obtained in the process of land transfer fees and real estate transfers.
However, when the economy enters a period of stability and real estate enters the ownership cycle from the development cycle, the government tax must shift from indirect taxes to direct taxes (property tax, income tax), such as real estate tax in the real estate ownership link. At present, China's ownership link tax is still in a marginal position in the entire real estate tax system.
Land finance
The result of the coordination of financial powers between the central and local governments
"Land finance" is an important perspective for observing China's macroeconomic trends.
Similar to the United States, China's road to land finance is not designed from the top, but groped out in the financial difficulties, and is precisely the result of the continuous coordination and compromise of the central and local fiscal powers.
The premise of land finance is the nationalization of land. The 1954 Chinese Constitution stipulates that "the state shall protect peasants' ownership of land and other means of production in accordance with the law." By 1956, collective ownership of land was implemented in rural areas across the country. The real policy of nationalization of land was established by the 1982 Constitution. The constitution states: "The land of the city belongs to the state. Land in rural and urban suburbs is collectively owned, except where it is owned by law by the State".
By the end of the 1980s, China introduced a land auction system that allowed local governments to auction state-owned land use rights. In the 1994 tax-sharing reform, the central government recovered part of the tax rights, and local governments obtained the right to the proceeds of urban land transfer. Historically, after the reform of the tax-sharing system, the central government has abundant financial resources, which supports its smooth implementation of large-scale reforms and infrastructure construction in the difficult economic period of the late 1990s. Local governments with tight finances began to "think about change when they were poor" and tried to expand the income from land transfers. It is worth noting that the United States is the federal government selling land, while China is the local government selling land (land use rights); the former property rights have changed, the latter property rights have not changed.
In 1998, the real estate market reform opened the way to break the ice. After China's accession to the WTO, China's economy has taken off and urbanized, and the corresponding investment heat and market demand have risen, coupled with the monetary easing promoted by the rapid increase in the central bank's foreign exchange account, as well as the growth of state-owned commercial banks, which have jointly created conditions for this industry.
In 2003, the Provisions on the Transfer of State-owned Land Use Rights through Bidding, Auction and Listing were promulgated, marking the official launch of the growth model of China's real estate and the continuous increase in land finance of local governments.
However, before 2008, the rapid expansion of real estate and the prosperity of land finance can only be regarded as taking advantage of the economic boom and being surrounded by investment. However, after the financial crisis in 2008, with the support of wide currency and wide credit, the development trajectory of real estate gradually deviated from the road of marketization, and real estate monetization and bubble appeared.
Local governments rely on land financing, commercial banks rely on real estate credit, urban investment companies and state-owned housing enterprises rely on land and credit capital, financial companies rely on wholesale capital on real estate mortgages, private capital depends on direct property arbitrage, and the public relies on the sense of security and happiness brought by this.
To sum up, China's real estate has gone through three stages of "fiscal breakthrough" at the end of the 1990s, "taking advantage of the momentum" after 2003, and "monetary tide" after 2008, forming a strong inertial potential energy with land finance and bank credit.
After 2019, with the countdown to the end of the monetization of shed reform, the shift of monetary policy to stable leverage and structural leverage, the increase in asset bubble risk, the strengthening of financial supervision and the tightening of the international environment, the strategic positioning of China's real estate has changed. At the national level, real estate has withdrawn from the ranks of the new force driving economic growth; the top level has repeatedly emphasized the suppression of real estate bubbles and the prevention of financial risks; at the same time, promote the pilot reform of real estate tax, improve the national tax system, and promote the gradual shift of land finance to long-term income of real estate tax transformation.
At the local level, however, the inertia of land finance remains strong.
tax reform
The inertia of land finance is still very large
In 2020, there will be 20 cities with more than 100% land financial dependence. There are 40 cities with more than 50% land financial dependence. Taking Xi'an as an example, in 2020, the city's land transfer income was 105.8 billion yuan, the general public budget revenue was 72.41 billion yuan, and the financial dependence on land was as high as 146.11%.
Behind the expansion of real estate prices and land finance is the intensification of credit and debt risks.
Since 2012, personal housing loans have historically replaced manufacturing loans and become the first direction of loans from the four major banks. At the end of the first quarter of 2021, residents' medium- and long-term loans increased by 1.98 trillion yuan, refreshing the record of 1.8 trillion yuan in the third quarter of 2020, an increase of 57% year-on-year, and most of the composition of medium- and long-term loans for residents is real estate mortgage loans. At the end of 2020, the debt balance of the household sector was 73.6 trillion yuan, an increase of 14.6% year-on-year, and housing loans accounted for more than 70% of the total household debt. The latest policy research released by the central bank shows that in the first quarter of 2021, China's macro leverage ratio was 276.8%, of which the leverage ratio of residents was 72.1%, the leverage ratio of government departments was 44.5%, and the leverage ratio of the corporate sector was 160.3%.
From the end of 2020, the policy is to suppress real estate prices, the main purpose is to avoid a crisis in this round of currency shift. In the long run, if real estate prices continue to rise, externally, the pressure of financial opening up is increasing, and the risk of dammed lakes is also increasing; internally, the blow to fertility, consumption and social confidence is getting heavier and heavier.
Solve the problem of real estate: one is to control the expansion of money and credit, the second is to distort the land and land finance system, and the third is to increase public housing investment. Nowadays, real estate has reached this point today, and it is necessary to reverse the inertia of land finance, shift the main body of taxation to the ownership link, and form a stable long-term mechanism based on direct tax, real estate tax and property tax.
There is an essential difference between land property and property tax. The income from land property comes from the sale of land, which is a kind of monopoly rent. As the new institutional economist North has studied, fiscal reform must align government revenues with the interests of the state and the people. Property taxes are a long-term mechanism. In Europe and the United States, the concept of property tax is similar to "property fee". Local governments levy property taxes to improve surrounding transportation, security, education and other facilities to maintain a stable living environment.
However, the complexity and arduousness of the legislation and collection of property taxes are far beyond the scope of tax reform.
Switching costs
From land finance to property taxation, there is a long way to go
At present, the real estate bubble is risky, the land finance is huge, and the challenges of property tax collection are complex. This institutional switch needs to consider two aspects of social costs:
First, from the perspective of the history of developed countries, the shift from indirect taxes to a perfect tax system based on direct taxes has experienced a relatively long and difficult period of pain [5].
The British individual tax originated from the "three-part composite donation" in the era of William Pitt Jr. in 1798, and was revived and abolished several times, until 1874, when William Gladstone was prime minister, and it was fixed in the British tax system for 80 years.
Germany began with the defeat of the Franco-Prussian War in 1808, after more than 80 years, until 1891, when Prime Minister Miguir issued an income tax law, the individual tax system was formally established.
The United States introduced income tax after the outbreak of the Civil War in 1861 and abolished it in 1872. President Taft raised another tax, which was declared unconstitutional by the Supreme Court. It was not until the passage of the 16th Amendment to the Constitution in 1913 that the individual tax was recognized.
Taxation is the foundation of a country, and the tax system switch is the division of interests, in which game conflicts are inevitable. In South Korea, the introduction of property taxes has been a difficult struggle, and the property problem has had a great impact on South Korean politics. Political factors are the biggest obstacle to the introduction of South Korea's property tax.
The second is the property tax pilot, which is a compromise and moderate transitional scheme.
Today, the pilot property tax reform, rather than the real estate tax legislation, suggests that this is a compromise and robust transitional approach. Compared with legislation and full implementation, the pilot reform is more flexible, flexible, local and time buffered.
Many people are concerned, how strong is the levy? How many sets of levies or how large per capita area are exempted? Will rents go up? If the levy is strong, will it hurt ordinary families or hit the real estate market? If the levy is too small, can the property tax cover a huge amount of land transfer income?
According to the research analysis of "Zeping Macro" [6]:
Taking the land transfer income of 5.2 trillion yuan in 2017 as the standard, the real estate tax should exceed the land transfer income; the tax rate should be more than 2.5% in the area of 0, and the tax rate should be more than 4% in the area of 12 days. Therefore, if the exempted area exceeds 12 square meters and the tax rate is within 4%, the property tax cannot replace the income from land transfer.
But given the risk of reduced fiscal revenues, China may take the middle way, that is, from direct taxes to indirect taxes in parallel with direct taxes, and land finance and property taxes. Here the question of whether to double tax needs to be considered. Therefore, fiscal reform is a systematic project.
Property tax is a difficult leap in a country's fiscal and social reform. If you can't jump over, the inertia of land finance may become heavier and heavier; if you jump over, property taxes seem to be magical.
bibliography
[1] "The Economic Cycle That Cannot Be Escaped", by Russ Tweed, translated by Dong Yuping, CITIC Publishing House;
[2] Land Finance: History, Logic and Choices, by Zhao Yanjing, Sohu.com;
[3] "The Real Estate Tax That Cannot Be Avoided", by China Index Research Institute, Sohu.com;
[4] "An Article to Understand How the United States Collects Real Estate Tax", by the real estate research team of CITIC Construction Investment, Observer Network;
[5] "The Practical Dilemma and Breakthrough Path of Land Finance to Real Estate Tax Finance", gao bo, Yangtze River Institute of Industrial Economics;
[6] Can Real Estate Tax Replace Land Transfer Income? Xia Lei, Huang Shi, Zeping Macro.