2014 International Conference on Management Science & Engineering (21th)

August 17-19, 2014 Helsinki, Finland

Property Tax Reform and Urban Sprawl

Evidence from Provincial Data in China
LI Jiao1,2
1 Faculty of Construction Management and Real Estate, Chongqing University, Chongqing 400045, P.R.China
2 Department of Architectural Engineering, Chongqing Radio and TV University, Chongqing 400052, P.R.China

Abstract: Property tax reform and urban sprawl
have become the policy concern of national prominence
in my country. It is very urgent to study the effect of
property tax reform on the urban spawl not only to
design and improve property tax reform but also to imply
decision on the Third Plenary Session of the 18thCPC
Central Committee. Using the provincial data from 2001
to 2011 in china, this paper tests the influence of the
property tax rate on turban sprawl from the current three
main ideas of property tax reform. The result shows the
increasing property tax can help curb urban sprawl.
Moreover, the negative effect of property tax in scheme 2
is most obvious. If extending the taxation scope to
commodity house, the same effect will also be achieved.
Keywords: urban sprawl, property tax, reform
scheme, panel data
1 Introduction
The decision on relating property tax reform at an
appropriate time and building a healthy urbanization was
adopted at the close of the Third Plenary Session of the
18th Communist Party of China(CPC) Central Committee
in china. On the one hand, as an institutional
environment, property tax which has always affected the
healthy development of the city is a major concern in
china. On the other hand, there is a close relationship
between the construction model of city public utilities
and the development of city housing industry. For my
country with a large population, urban-rural dual
structure is a main obstacle to integrated development.
Urbanization is characterized by accelerating urban
sprawl. Over the past time, urbanization accelerated
presents a serious challenge to the construction of public
utilities in china. Therefore, it is very urgent to study the
effect of property tax reform on urban sprawl not only to
design and improve property tax reform but also to imply
decision of the urbanization.
Urban Sprawl is characterized by scattered and
poorly planned low-density development beyond the
edge of urbanized areas. Many cities have expanded and
density per capita has declined drastically(J.K.
Brueckner,2000).[1] Moreover,urban sprawl can take
different negative forms, such as the loss of open space,
pollution, traffic congestion, the separation of residential
and work locations, even the impact of income
distribution(Thomas J. Nechyba and Randall P. Walsh,
2004).[2] Most foreign economists have linked inefficient
levels of sprawl to negative externalities ,subsidized
roads, and distortionary real estate taxes. Brueckner and
Kim (2003) studied the effects of property tax on urban
spawl. They consider that it is ambiguous for the
influence.[3] Yan Song and Y. Zenou(2006)develop a
model that adopts a log-linear utility function with a
variable elasticity of substitution greater than one and
show that increasing the property tax reduces city size
unambiguously. They then find that higher property tax
indeed result in smaller cities.[4]H. Spencer Banzhaf and
Nathan Lavery(2010)explore Urban sprawl,the land and
split-rate tax, looking at a panel of land uses and
demographics in Pennsylvania.They confirm the
theoretical prediction that the split-rate tax raises the
capital/land ratio.[5]In addition,many scholars have
argued that property tax reduces urban
sprawl.(J.K.Brueckner;Colwell,Peter.;England,Richard;N
echyba,Thomas.J;Youngman,Joan.M., Malme, Jane.H.et
al.).[6]-[14]
But there have been few empirical tests of these
effects of property tax and urban spawl in china.For
example, based on the phenomenon of city expansion,
Guo Hongbao (2011) tested the effect only from the
impact of property tax on housing price.[15] The reasons
of lack of empirical research lie in that property tax
reform ,which has no clear program and has very little
basic data , is still in the pilot phase.However, it is not
beneficial not only to improve the plan of property tax
reform but also to develop the ideas of urbanization. In
short, how is the relationship between property tax and
urban spawl? what will be given urban spawl for
property tax reform? This paper will simulate and
analyze the influence from the current three main ideas
of property tax reform.
The paper proceeds as follows. Section 2 outlines
the theoretical model, Selects data and sets up the
Scheme of Property tax reform. Section 3 develops the
model and describes the empirical test on the impact of
property tax on the urban spawl. The conclusion is

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978-1-4799-5376-9/14/$31.00 2014 IEEE
presented in Section 4.
2 Theory
2.1 Model and variables
According the standard of being used by Guo
Hongbao (2011) in the city expansion model, We now
investigate the relationship between the property tax and
urban sprawl. The model adopts a log-linear utility
function of Song and Zenou (2006) [16], which is
reasonably join the property tax variables, and
investigates the relationship between property tax, urban
sprawl, residents' income, housing prices, and
commuting costs through the general equilibrium
analysis. Then, we finally obtain the optimal scale and
optimal resident utility level after the introduction of
property tax:
1 (1 t ) N cr
x *f ln (1 ) (1)
2c 2 R Ar
1 N cr R Ar
u* y 1 ln ( ) (2)
2 2 (1 t ) (1 t ) 2
Assume that the city is closed and landlords are
absentee,we have:
x *f
u * (3)
0, 0 Scheme2:Combined with the current various main
t t
Therefore, an increase in property tax
unambiguously decreases both urban sprawl and the
utility of consumers. Namelythe impact of levying taxes
on housing price is realized by affecting consumer choice
and urban sprawl. If there are some speculation in
housing market , the levying property tax will increase
housing holding cost. This will lead to the withdrawal of
investment from residents of housing consumption. In
addition, urban sprawl can not be attributed to a single
cause. There are many factors which affect urban sprawl,
such as the growth of population, infrastructure
construction. In order to eliminate the endogeneity
problem caused by omitted variables, we chose these
factors as control variables. As a result, for the
association between property tax and urban sprawl, it can
be expressed as follows:
4
area 0 1 taxv 2 road n xn (4)
n 3
Let area denote the city construction area which is
as a proxy for urban spawl. i (i 1, 2, 3, 4) is as the
influence coefficient of each variable. And taxv indicates
the effective tax rate for property tax (which are the
product of property tax and sales revenue)from the
different schemes. Because there is the most direct
relationship between the residents consumption and
income, the total wages of staff in city is as a proxy for
the consumer utility level. For the other control
variables, xn is respectively the city population ( x1 )and
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the commuting costs( x2 ). While city road area is as a
proxy for the commuting costs, there are following
reasons: (1)The data of city commuting costs cannot be
directly obtained.(2)But it is closely related with the city
infrastructure, especially roads. It is generally believed
that the rapid growth of city road area will inevitably
lead to lower transportation costs.
2.2 Property tax reform schemes
There is no definite plan for property tax reform,
and residential is not included in the tax scope. But from
the expert opinion and the pilot scheme, property tax is
essentially taxed in the holding stage. Furthermore, the
land may be part of the scope on property tax and the
overall real estate system should be adjust and
reform(see e.g Gu Yunchang,2013). The next step on
property tax reform is those taxes in the link of
construction and trade will be reduced, but in the link of
hold will be increased(Lou Jiwei,2013).[17]Consequently,
considering the various real estate taxes and the burden
of residents, we build the following three schemes which
come from China Economic Research Center of Peking
University[18] and Ba shusong [19],respectively.
Scheme1: Combined with the current taxes in the
link of holding real estate (such as , property tax, urban
land use tax).
taxes about real estate(such as, property tax, urban land
use tax, city maintenance and construction tax, land
value-added tax, deed tax).
Scheme3:Combined these taxes from Scheme2 with
the part of land grant fee.(namely, the land grant fee only
includes government income, accounting for about
30%.It will be calculated according to rate of certificate
bonds in 2013 and be shared by 70 years.)
Finally, each scheme for taxation scope is also
divided into residence and commodity house,
respectively.
3 Empirical test
3.1 Model form
As stated above, because of lack of data from Tibet,
this paper collect the provincial panel data except Tibet
in china and develops a regression model. All data for
this study come from China Statistical Yearbook, China
tax Yearbook, China land resources Yearbook and China
economic information network covering the period from
2001 to 2011.
First of all, this paper has carried on the model
specification test to avoid the deviation and improve the
effectiveness of the estimation of parameters. According
to the form of setting test method ( N 30, k 4, T 11) ,
F statistics is respectively: F1 0.4946, F2 0.8721 Under
.
the significant level of 5%,after check the F distribution
table, we have:
F1 (174,120) 1.3245, F2 (203,120) 1.3145 . And
thus F1 1.3245, F2 1.3145 , we accept the hypothesis and
chose the following pooled regression model:
4 generalized least squares(FGLS) to correct the panel, the
areait 0 1taxvit 2 roadit n xnit uit
n 3
i 1, 2, ..., 3 0, t 1, 2, ...,1 1 uit is also referred to
as the random error. Secondly, There have been few
empirical tests to screen and test model by the F test, the
individual effects of Breusch-Pagan test and Houseman
test. Tab.1 presents using the fixed effects model. It is
well known that the fixed effects model should be used
instead of the random effects model, when the panel data
from small sample. Generally, It belongs to the small
maternal condition that the data come from 30 provinces
and cities in the paper. Based on the results of theory and
test which ,therefore, fixed effects is suitable for the final
model.
To avoid the estimation error, It is still considered
further about the groupwise heteroskedasticity, the
autocorrelation between the cross-section and time
dimensions in fixed effects. Next, the residuals have be
test. The results are thus consistent with those reported in
Tab.2.
3.2 Results
Tab.2 reports that there is the autocorrelation and
heteroskedasticity in panel data. Therefore, using feasible
final regression results in Tab 3 and 4. Under the level of
5%, Tab.3 and Tab.4 illustrate that none of adjusted
(5)
R 2 values are less than 98%, which is high considering.
That is that the urban sprawl above 98% can be
explained by other variables, and the fit of the model is
very high. On the one hand, according to the estimated
coefficients, the most significant relationship between
urban sprawl and various variables is taxv, whether the
scope of taxation is extended to residential or
commercial housing. The coefficient of the property tax
rate is negative and statistically significant. And the
relationship is always negative. It unambiguously show
that increasing the property tax reduces the size of the
city. Moreover, it also reveals that the growth of city
population, followed by the development of
infrastructure, might be the most important potential
causes of urban spawl. Compare to population and
infrastructure, the level of residents' income has much
smaller positive influence on city expansion. These
findings are roughly consistent with the findings of
Brueckner and Fansler(1983) and Henderson(1985) on
construction on urban spawl.

Tab.1 The result of screen and test model

Content Method Null Hypothesis Test Results

Breusch and Pagan No individual random Chi-Sq Statistic=560.4913 prob=0.0000,

Pooled OLS or
lagrangian multiplier effects, error distribution, Reject the null hypothesis and select
random effects
test H 0:2=0 Random effects

F=19.2553>F0.05(29.294)=1.5062Reject
Pooled OLS or Significant at Individual
F test the null hypothesis and select fixed
fixed effects effect,H0:1=2=....=n=0
effects

Random effects was

established, and Individual Chi-Sq Statistic=43.0625 prob=0.0000
Random effects
Haunsman test effects and the explanatory Reject the null hypothesis and select fixed
or fixed effects
variables are also effects
independent.

Tab.2 The result of heteroskedasticity and correlation test

Content Method Null hypothesis Test results

Chi-Square=15.2689 prob=0.0001,Reject
autocorrelation in H 0:no first order
Wooldridge test the null hypothesis and exist serial
the groups autocorrelation
correlation in the groups

F(1,29)=4.1830 prob>F=0.0000,Reject
autocorrelation in H 0:difference in
Pesaran test
the cross-section coefficients not systematic the null hypothesis and exist correlation in
the cross-section

Chi-Square=14.2089 prob=0.0001,Reject
Groupwise H0:Between group with
Modified Wald test the null hypothesis and exist Groupwise
heteroskedasticity heteroscedasticity
heteroskedasticity

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 On the other hand, according to the Comparison
among different schemes, the coefficient of effective
property tax is improved quickly from scheme 1 to
scheme 3. In particular, the growth rate reaches its
climax in scheme 2, which is 48.11%and 47.84%,
respectively. It also show that an increase in property tax
from scheme 2(this is referred to tax together in the link
of transfer and maintain) will unambiguously curb urban
sprawl.
There are multiple causes which led to the
endogeneity problem in model, such as omitted variable
measurement error, simultaneity. As stated above, the
influence of measurement error and omitted variable in
the model are only considered. But in theory, there are
two countervailing effects of an increase of property tax
on urban sprawl. On the one hand, an increase in
property tax will curb urban sprawl. On the other hand,
urban sprawl may also lead to the growth of property tax.
Therefore, this paper adopts education as the property tax
instrumental variables to eliminate this bias which come
from the simultaneity. There are some reasons on the
choice of education. First of all, the education has not a
direct effect on the unbar spawl. Secondly, as a local tax,
the property tax will undoubtedly have an important
impact on the local governments because the education
funds occupy the largest share of tax expenditure of local
government. Tab.5 and 6 present the regression results
after introducing instrumental variables.
Compare to the above analysis, the fit of the model
is further increased to 99% after introducing instrumental
variables. The coefficient direction remains unchanged,
and the relationship among the various coefficients is
still consistent. At the same time, no significant change is
in plan. It is important to observe that the absolute value
of property tax coefficient has decreased obviously. The
obvious change after introducing instrumental variables
reveals that there are other noneconomic effect of unbar
spawl. The finding here is similar to the reported by Guo
Hongbao(2011). That is, as Guo Hongbao assert, the
irrational spending behavior under political impulse
might affect the city expansion.

Tab.3 Regression results (taxation scope: residence)

Variable Scheme 1 Scheme 2 Scheme 3
Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
C -1717.8850 -11.0151 -1743.1400 -11.1275 -1741.0260 -11.1013
Taxv -325.5493 -1.9637 -168.9516 -2.3513 -159.9220 -2.2458
Income 0.0061 2.2501 0.0060 2.2337 0.0060 2.2275
Population 0.5214 13.4478 0.5319 13.4843 0.5312 13.4348
Road 0.0435 30.5531 0.0429 28.8052 0.0429 28.7649

R-squared 0.9899 0.9901 0.9900

Adjusted R-squared 0.9888 0.9889 0.9889

F-statistic 887.4616 892.4627 891.0118

Durbin-Watson stat 0.7150 0.7127 0.7119

Tab.4 Regression results (taxation scope:commodity house)

Scheme 1 Scheme 2 Scheme 3
Variable
Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
C -1709.3740 -10.9716 -1729.8640 -11.0656 -1727.8640 -11.0427
Taxv -366.2718 -1.7871 -191.0634 -2.1375 -180.6550 -2.0335
Income 0.0061 2.2637 0.0061 2.2506 0.0061 2.2457
Population 0.5186 13.4142 0.5276 13.4388 0.5269 13.3941
Road 0.0437 30.9601 0.0432 29.3822 0.0432 29.3544

R-squared 0.9900 0.9900 0.9900

Adjusted R-squared 0.9889 0.9889 0.9889

F-statistic 885.4812 889.5924 888.2953

Durbin-Watson stat 0.7159 0.7142 0.7134

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 Tab.5 Results after introducing instrumental variables (taxation scope: residence)
Scheme 1 Scheme 2 Scheme 3
Variable
Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
C -1450.8950 -9.5278 -1455.0740 -9.4059 -1451.4140 -9.3767
Taxv -153.6523 -0.9727 -54.6643 -0.7793 -46.9002 -0.6753
Income 0.0053 2.0904 0.0053 2.0938 0.0053 2.0930
Population 0.4623 12.3051 0.4636 11.9621 0.4624 11.9072
Road 0.0361 20.3995 0.0361 20.2995 0.0362 20.2940
R-squared 0.9912 0.9912 0.9912

Adjusted R-squared 0.9902 0.9902 0.9902

F-statistic 978.3180 977.1878 976.6834

Durbin-Watson stat 0.7426 0.7402 0.7408

Tab.6 Results after introducing instrumental variables (taxation scope : commodity house)
Variable Scheme 1 Scheme 2 Scheme 3
Coefficient t-Statistic Coefficient t-Statistic Coefficient t-Statistic
C -1444.5480 -9.5100 -1446.3040 -9.3984 -1442.9860 -9.3734
Taxv -158.8009 -0.8143 -52.5034 -0.6038 -43.2370 -0.5007
Income 0.0053 2.0978 0.0053 2.1006 0.0054 2.1003
Population 0.4602 12.3031 0.4607 11.9822 0.4595 11.9322
Road 0.0362 20.4948 0.0362 20.4233 0.0363 20.4221
R-squared 0.9912 0.9912 0.9912

Adjusted R-squared 0.9902 0.9902 0.9902

F-statistic 977.3741 976.3783 975.9987

Durbin-Watson stat 0.7438 0.7423 0.7429

4 Conclusions
The influence of the property tax rate on urban
sprawl is of primary interest to this research. This result
supports what has been predicted by the theory: the
increasing property tax can help curb urban sprawl.
Moreover, the negative effect of the property tax in
scheme 2 is most obvious. If extending the taxation
scope to commodity house, the same effect will also be
achieved.Therefore,We argue that a successful property
tax reform should take into account each party of
behavioral reaction on these plans and regulations to
develop effectively urban sprawl. How to carry out these
measures is an interesting area for future research.
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