Collecting Land Value Through Public Land Leasing

In this paper, John E. Anderson examines the experience of leasing public land in China. Specifically, he addresses the issues related to the adoption of a proposed ad valorem property tax within a public leasehold system. He also explores how long-term leases may affect the government’s ability to capture land value increases.

Anderson argues that there is no technical problem of introducing a property tax in China. There are ample examples of Western governments collecting property taxes on public leaseholds. The challenge in China is that leasehold charges established through negotiation do not reflect the market value of land and thus are not useful for tax assessment purposes. With regard to the effects of long lease terms on the government’s ability to capture land value, Anderson asserts that the Chinese government is giving up substantial amounts of revenue in order to retain the option to redevelop land at the end of the lease. To balance this tradeoff, the government could introduce more flexible lease terms and allow lessees to extend their leases for another term with payments of higher land rents or leasing fees. This may allow the government to capture a larger share of the increased land value over time.

Guanzhong James Wen raises two concerns about the Chinese public leasehold system. First, he argues that the coexistence of private and public land markets is a precondition for the success of public land leasing. The private land market provides land price data for setting leasehold charges and tax assessments. More important, it gives land users an option to exit from the public leasehold market if the government overcharges lessees for using land. The absence of an active private land market in China could lead to inefficiency there. Second, local governments in China depend on leasing fees to finance urban infrastructure and basic services. Wen asserts that this land-based public finance system has increased income inequity and social injustice. Property prices in major cities have skyrocketed and in turn have negatively affected middle and low-income households. The financial impact is especially serious for those who have migrated to cities from rural areas for employment opportunities. Until recently, lease revenues collected by local governments have rarely been used to build affordable housing or provide other public goods for the poor.

This paper was presented at the Lincoln Institute’s annual Land Policy Conference in 2011 and is Chapter 6 of the book Value Capture and Land Policies.