In OECD and partner countries recurrent taxes on immovable property are among the most important subnational revenue sources and are used to finance key government responsibilities. An efficient and effective design and administration of these growth-friendly taxes are crucial for society to reap their numerous benefits that range from supporting land-use policies to promoting a healthy real estate market. Nonetheless, designing and managing these taxes in an efficient and effective manner is a complex endeavour. Recurrent property taxation is usually an element of a broader discussion on the intergovernmental fiscal framework, land-use policies and property rights, all of which vary widely across countries. As a result, reforms require a careful analysis of a country’s particularities, which makes every reform unique and challenging.

This report looks at crucial elements of reforms to growth-friendly recurrent taxes on immovable property. Tax design practices in place in OECD and partner countries are compared and analysed through the lenses of economic theory and empirical analysis. Challenges and practices related to the administration of property taxes are explored as well as their interplay with different tax designs. In addition, the main political and administrative hurdles in approving and implementing property tax reforms are discussed, and the approaches commonly employed to successfully deal with them are examined.

In contrast to most OECD countries, China does not levy a recurrent tax on residential property. Recurrent property taxes are growth-friendly and versatile, and they are especially valuable for raising revenues at the local level, notably to foster economic development. Despite these benefits, recurrent taxes on immovable property are among the most challenging taxes to administer, primary due to the need to revalue properties frequently. In addition, reforms to recurrent taxes on immovable property are difficult due to the tax’s frequent unpopularity as well as its interactions with intergovernmental fiscal frameworks. Nevertheless, many successful recurrent property tax reforms have been implemented by OECD and partner countries in recent decades, especially following the Global Financial Crisis. The aim of this book is to draw on these examples to provide recommendations for the introduction of a recurrent levy on residential properties in China.

Recurrent taxes on immovable property are not among the largest for governments as a whole in terms of their revenue collection, but because of their immovable tax base, this type of tax is frequently the tax over which local governments can exert the most control. This autonomy is especially valuable as it allows local governments to adjust their revenues intake to fulfil local demands, increasing political accountability. As a result, recurrent taxes on immovable property can raise enough revenues to fund important public services at the local level, such as housing and community amenities, public order and safety as well as a portion of local expenditure on education, health or social protection.

The main motivations for introducing recurrent taxes on immovable property are to increase tax system efficiency, boost subnational revenue autonomy, make the real estate market more stable and improve quality of land use. Yet recurrent taxes on immovable property may distort investment allocation decisions and can have positive or negative distributive effects. In order to achieve these multiple advantages while minimising the potential downsides, different tax designs are employed across various OECD countries. Tax rates may vary horizontally (i.e. with property use, property characteristics and/or owner characteristics), vertically (i.e. with property value) and regionally (i.e. across jurisdictions). Most countries provide targeted tax benefits, most of which are aimed at low income homeowners and businesses, with substantial differences in the form of the benefits and on their eligibility. This chapter explores such differences in tax design across OECD countries.

Recurrent taxes on immovable property are among the costliest taxes to administer. That is because their administration involves several activities: fiscal cadastre maintenance, valuation of properties, management of an appeal system, billing, revenue collection and enforcement. A dysfunctional tax administration can lead to asymmetries in tax obligations that can undermine the goals of the tax design while creating horizontal inequality that make charges unfair. As most of the benefits from recurrent taxes on immovable property can only be reaped with value-based tax bases, it is especially challenging to keep a fiscal cadastre with a good coverage and updated property values. Computer assisted mass appraisal (CAMA) systems can be especially relevant for such purposes. Lastly, the billing and appeal process are particularly relevant for raising taxpayers’ compliance, with the bills’ content and frequency being relevant for raising tax revenues and alleviating taxpayers’ liquidity problems.

Recurrent taxes on immovable property tend to be unpopular among taxpayers for numerous reasons, including their visibility, indirect relation to income, perceived regressivity, potential for tax hikes and lack of sensitivity to economic growth. These challenges can be addressed through a combination of having frequent property reassessments, coupling tax reform to improvements in local services, allowing payment in instalments, provision of tax benefits and taxpayer education. It is also crucial to consider the impact of the reform across regions and levels of government – these reforms may exacerbate regional inequalities, which can be minimised with changes to equalisation systems. Gradual introduction of the reform can also be valuable to avoid abrupt and distortionary changes in tax obligations, as well as bundling the property tax with the reform of other related taxes. Lastly, timing can be crucial, with booming housing markets often being an ideal period to put forward such a reform.

This annex is based on the OECD Global Revenue Statistics database, accessible at: https://www.oecd.org/tax/tax-policy/global-revenue-statistics-database.htm.