by Giorgio Brosio, University of Torino
Sintesi
L’urbanizzazione è alle spalle della sostanziale crescita dell’economia cinese, ma il modo in cui è avvenuta è anche alle radici di consistenti danni ambientali. La promozione di una crescita urbana sostenibile da un punto di vista ambientale richiede una riforma degli incentivi politici e degli strumenti fiscali. L’articolo che segue fornisce alcuni suggerimenti focalizzati sulla riforma di strumenti di tassazione subnazionale.
Abstract
Urbanization is behind the fantastic growth of the Chinese economy, but the way it has proceeded is also at the roots of the huge offenses suffered by the environment. Promoting urban green growth requires a reform of the political incentives and of the fiscal instruments that have presided to urbanization. The text that follows provides a few suggestions focused on reform of subnational tax instruments.
1.Urbanization and growth
The speed and scale of urbanization process and the gravity of associated environmental challenges make China unique. More than 500 millions people have moved to the cities in the last decades. The country has the largest number of megalopolis in the world. Cities have been the main vehicles of economic growth in China since reform started in the 1980s. Special economic zones turned small villages into megalopolis. Innovative firms and sectors are thriving into them. Rural migration to cities has provided abundant and cheap labor force to feed industrial growth. But a large share of these migrants, estimated to be more than 200 millions, are “illegal” second class citizens, having moved without a residence permit and are deprived of access to education, health care and other basic social services.
Urban growth is expected to continue as China converges towards the income levels of developed countries. The urbanization rate is projected to reach 65% by 2030, which would imply an urban population of 950 millions (UNEP, 2013, The Economist, 2015).
Ill-defined ownership rights of farmers have encouraged the urban sprawl. Local officials, whose career is still dependent on achievement of growth objectives, have been able to expropriate rural land easily and at little cost. This has pushed migration to cities and has provided wrong incentives, making redevelopment of existing urban areas less attractive. Too many and also polluting factories have been induced to remain in the urban areas rather than move to cheaper sites on outside areas. Still China’s megacities are less dense than equivalents elsewhere in the world, although heavily polluted. Urban sprawl has resulted in a loss of cultivated land in a country, whose capita stock of farmland is much below the world average.
Traffic represents one of biggest challenges. Massive spending on infrastructure has hugely improved connections within and between cities, but has created further traffic. Public transportation has been expanded, but frequently with low organization efficiency. Buses, metros and rail networks are managed by separate agencies and poorly integrated.
2.Monumental challenges regarding the environment
The rapid, more than tenfold, increase of private cars in the past decade has added to the damages created by the inefficient regulation of industries and more in general by the inefficient use of energy. The air of Chinese cities ranks amongst the most polluted in the world. Particulate is the biggest threat to health. China is also now the largest producer of carbon dioxide (CO2) emissions (OCDE, 2013 and original sources quoted there). High concentrations of primary pollutants have also led to a high incidence of other types of pollution, including smog and acid rain. Water pollution is also a severe problem, with over 40% of inland rivers considered to be unsuitable even for human contact (OCSE, 2013).
There is irrefutable evidence of significant adverse health effects in China from exposure to ambient pollution and environmental accidents. Notwithstanding some notable improvements in pollution levels in recent years, urbanization and rising incomes are continuing to increase environmentally created health problems and their economic cost. Environmental challenges are already imposing constraints on the growth of Chinese cities, notably in ensuring adequate supplies of fresh water.
The country has also spent since early 1990’s a huge share of its national income on average 8.5% on urban infrastructure. This is far more than Europe and America (2.6%) or India (3.9%).
A series of manmade tragedies that have struck Chinese cities in recent years are telling, although episodically, examples of the fact that despite the huge expenditure big problems and emergencies still remain. The tragedies include the collapse of a mountain of mud and construction debris in Shenzhen in December 2015, an explosion at a hazardous materials warehouse in Tianjin in August of the same year and fatal floods that overwhelmed new sewer infrastructure in Beijing in 2012 (Minter, 2015).
These disasters are unique in their own way, at the same time their occurrence signals the incapacity on the part of the Chinese government to build and maintain safe cities for their residents.
3.Need for a radical change in fiscal incentives
The solution to the above-mentioned problems and emergencies requires a fundamental reshaping of the economic and fiscal incentives facing especially local officials, implying a deep reform of the system of financing subnational governments. One of its main ingredients would be replacing the proceeds from the sale and development of land with a fully-fledged property tax and with one or a few specific environmental instruments targeted to reduce traffic congestion and pollution. The new tax instruments would bring substantial revenue to tackle expenditure needs but also, and equally important, provide the needed correct incentives.
As a matter of fact local governments face most of the challenges being responsible for much of infrastructure and provision of services. China is in terms of expenditure one of the most decentralized countries of the world, where the central government accounts only for 30 per cent of national expenditure, while the subnational governments account for the remaining 70 percent.
At the same time subnational governments have few own tax revenue resources and little discretion over tax rates and policy. Central government transfers are allocated mainly for current spending, leaving a small margin to finance infrastructure. Direct borrowing is legally forbidden, although the prohibition is only partially enforced, as shown by the fact that subnational governments run a deficit estimated to be around 2-3% of GDP.
To fund infrastructure investment these governments have made extensive use of off-budget mechanisms with very little monitoring and central oversight adding to the risks of insolvency. Clearly, the borrowing system needs reform that will not come easy. More specifically, the big step would be to close the back door and open the front door: i.e. the reform should allow local governments to borrow from banks and to issue bonds. Borrowing will, however, remain a problem as local governments own banks that in turn subscribe the bonds.
The main source of revenue are the proceeds from the sale and development of land, more precisely the land leasing fees, representing one third of total tax revenue (32.5% in 2010, against a mere 4.5 percent in 1999). These fees are not only the main source of revenue for local governments, but they are also a main contributor to the urban sprawl, inserting a vicious circle by which financing needs of local governments are satisfied with the sale of land whose development requires additional spending and in turn creates new revenue needs. The urban sprawl has been amplified by cheap credit for the acquisition of residential property, a big share of which is done for investment purposes. As a matter of fact, vacant property has continued to expand even in the recent years of economic growth deceleration. It has been estimated1 that one billion square meters are presently vacant in the urban areas. One has also to remark in this context that new home prices in 70 large cities rose by an average of 1.6 per cent year-on-year in December according to China’s National Bureau of Statistics (as reported by the Financial Times, January 16, 2016). The property market looks more attractive than unsteady stock markets in China.
Taxes on property, the detail of which is reported in Table 1, represent only 15% of total tax revenue, but a with a prevalence of taxes on transaction of properties.
Table 1. Taxes on Land and Property in China, as of 2008. Source: based on Joyce Yanyun Man (2012) with some integration by the Author.
All this points again to the need of deep reform of taxation, with a focus on property tax. There are many reasons. The first reason is the large potential revenue of a fully-fledged property tax providing funds for the much-needed expenditure and making the sale of land less indispensable. The second one is stability of revenue. The third reason is the efficiency features of the tax. It stimulates use of vacant property. Also, and possibly more importantly, it establishes a direct link between investment and other policies by local governments and value of properties. Good policies and needed investment increase value and the tax base and vice versa for bad policies, strengthening political and fiscal accountability. Properly defined property for taxation purposes also facilitates access to credit needed to finance a sustainable urbanization strategy.
Recurrent property taxes, meaning taxes levied on ownership of property and not on transfer of it, are presently marginal accounting only for less than 6 percent of subnational tax revenue. This is because residential property owned by Chinese is exempt and only property used for business is taxed. Moreover, the tax base is not the market value, but at best initial value with some adjustments, leading to a big understatement of real values. Finally, the tax rates are low. Taxes on property transactions fare little better in terms of revenue, but they provide wrong incentives stimulating local government to endless promotion of building activity and have an unstable basis depending on fluctuation of prices.
While the role of a fully-fledged property tax is crucial for the development of an urban strategy underpinning sustainable growth, challenges of design and implementation are formidable, because of insufficient definition of property rights. One has also to take into account popular opposition to it, since no tax has been paid on residential property since 1949, while acquisition of first, second and third property is a widespread form of saving, as mentioned above. Finally, there are also problems of administration, starting from assessment of values that is still problematic. The lack of a proper registration database is one reason it may take some time. The lack of national standards on basic information, like who owns which property, is also an obstacle that will likely take some time to resolve.
However, things are on the move. As it happens in most areas in China, big reforms are preceded by pilot projects and experimentations in a few selected areas. Early 2011 Shanghai started to tax newly purchased second homes of residents and first homes of nonresidents on the basis of their market value, with the exclusion from the tax base of 60 square meters per person.
Chongqing is targeting the existing single-family residences and newly purchased luxury apartments of residents, or newly purchased second homes of nonresidents. The program excludes 180 square meters for the single-family residences and 100 square meters for apartments in Chongqing. Only about 8,000 parcels are reported to have levied a property tax in these two cities combined. Despite the small coverage the direction of the reform seems to be correct.
The People’s Daily announced on August 2014 that the country is likely to introduce a nationwide property tax as early as following year (2015). An English “Community Charge” type property tax, where the tax is paid by the occupant of the dwelling and by the owner when occupancy and ownership coincide would suit quite well China, where property rights are not yet well defined. It will establish a strong link to benefits received. It would reduce the number of vacant properties, easing rents and dampening the increase of property prices.
4.Congestion and distance related taxes
These instruments are more effective in solving traffic problems that specific measures already introduced in Chinese cities, such as parking fees, driving bans or limitations to traffic and restrictions to car purchases. They are suggested by an increasing literature (see for example International Council on Clean Transportation, 2010) and are sponsored by governments, particularly in the Scandinavian countries. There exist a still limited number of cases of implementation of congestion charges: London, Milan and Singapore, where a congestion fee is applied to vehicles passing through cordons that identify central and congested areas. They are considered with increased interest in Chinese cities, overwhelmed by a staggering increase of vehicles in urban centers. Hong Kong has pondered from a long time the introduction of a congestion charge and detailed studies with alternative options are available.
Distance related taxes are more powerful instruments covering both urban and rural areas but discriminating between them. They supplement national fuel taxes with local instruments impacting on urban planning and have revenue potential that supplement funds for sustainable growth infrastructure.
References
International Council on Clean Transportation, Congestion Charging: Challenges and Opportunities, 2010.
Joyce Yanyun Man, China’s Property Tax Reform: Progress and Challenges, Land Lines Lincoln Institute of Land Policy, 2012.
The Economist, The great sprawl of China. How to fix Chinese cities. Jan 24, 2015.
Minterm Adam, The Tax That Can Make China's Cities Safer Bloomberg View, December 23, 2015.
OECD, Urbanization and Green Growth in China, Paris, 2013.
1 According to a declaration of Zhu Min, Deputy Managing Director of IMF widely reported in the Chinese press.
