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'Land Tax' and high land prices in Hong Kong

1. The Hong Kong Government derives a major proportion of its revenue from land, including premium on new land and modification of existing leases, rates, property taxes, stamp duty on property transactions, rents. In 1993/94 such revenues net of land production cost, including the share taken by the Land Fund which will revert to the SAR Government after 1997, amounted to HK$56 billion, or 35% of total government revenues including Land Fund income. (This does not include profits tax on property transactions). This amount is larger than the profits tax yield.

2. After 1997 this amount will increase because of the 3% annual rate chargeable on grant of new leases.

3. It may be said that land tax is one of the major taxes in Hong Kong, if not the major tax. If all forms of land tax were cancelled, to replace the lost revenue in 1993/94, the Government would have had to more than double the profits tax rate. This puts into perspective the frequent claim that Hong Kong is a low tax regime. It is not in fact so low compare with other Asian countries, merely that taxes are paid on land rather than on profits or earnings.

4. One of the main drives of Government policy is to keep land prices high so that the yield from the various land taxes remains high. Crown land is released in a controlled manner at auctions with care taken to ensure that the market is not flooded. A reserve price is posted and the land withdrawn if this is not reached. Similar considerations apply to the careful management of marine area that can be converted into land. This policy takes precedence over other Government policies, e.g. even when the Government adopted a policy in 1994 of encouraging lower land prices, it still maintained its policy of reserve prices at auctions and withheld land on numerous occasions even though this would have the effect of keeping prices higher than they would otherwise be.

5. The Chinese government has been a strong supporter of the high land price policy and has criticised the Hong Kong Government strongly for any move that might result in lower land tax yields. Under the Joint Declaration the annual area of land release is restricted to 50 hectares, as controlled by a Sino-British Land Commission.

6. The implications of the high land price policy are far-reaching:

• Generally, land prices are higher and less land (or accommodation space) is available for people and business in Hong Kong under the policy than would be the case without it. The social and economic effects of this policy are very significant.
• Maintaining the policy drives the Government into an "unholy alliance" with the property developers and the banks who all have an interest in maintaining prices as high as possible.
• The policy encourages an unhealthy reliance by the Government on administrative measures rather than market forces. So, for example, the Government chose to make its intervention in the property market in 1994 by administrative measures, e.g. by making presale of flats difficult, rather than by "open market operations", i.e. by releasing more land. This sets an ominous precedent.
• To compensate for the distorting effects of its policy, the Government is forced into further intervention in the market process by widely providing public housing. It is astounding that in a supposedly free market economy, more than 40% of the population live in public housing - all owned by a single landlord. This policy is even being extended by the so-called "sandwich class" housing support programme.

7. Despite the high importance of the issue, public awareness is very low, and the Government is rarely if ever challenged. It may be that Hong Kong people are happy to be taxed this way, but they have never been asked.

8. To encourage greater public awareness, a motion debate in the Legco could be put forward, along the following lines:

"That in view of the fact that the Government draws a major part of its revenues directly or indirectly from the disposal of land, of which it is the monopoly supplier, and that such revenue-raising constitutes a form of taxation on the community, this Council urges the Government to adopt a policy of releasing land more freely and making good any revenue shortfall by alternative means."

Hong Kong Democratic Foundation
January 1996