Fate of ’05 real estate tax hangs in balance

Finance Minister Hyun Oh-seok answers questions during a debate in downtown Seoul yesterday. [NEWSIS]

Will the government actually reform the comprehensive real estate tax in an effort to bring a zombie housing market back to life?

It’s possible, according to a top economic policy maker.

Deputy Prime Minister for the Economy Hyun Oh-seok, who is also Finance Minister, said yesterday his ministry will review all taxes related to properties, including?the comprehensive real estate tax and the general property tax.

“Related government branches will discuss revamping the comprehensive and property taxes next month,” Hyun said at a ministerial meeting on current economic conditions yesterday. “The ministries will also push for passage of key bills of the April 1 housing market policy package as soon as possible and decide how much cuts in the acquisition tax will be made.”

His statement comes after growing skepticism about the effectiveness of the government’s April 1 policy package. After the housing market remained stagnant following the announcement of the policy, the Finance Ministry decided to lower the acquisition tax rate permanently last month.

The comprehensive real estate tax, which took effect in 2005, was introduced to contain speculative bubbles in the housing market.

A possible way to restructure those taxes is to combine the comprehensive tax with the general property tax. While the comprehensive tax is a national tax, the property tax is a tax collected by local governments.

Saenuri Party lawmaker Nah Seong-lin said he plans to propose a bill to combine the comprehensive tax with the property tax in September.

Elimination of the comprehensive tax is controversial at a time of falling tax revenue. In the first half of the year, the government collected?10 trillion won (8.95 billion) less in total tax revenues than in the same period last year.

Proponents say eliminating the comprehensive real estate tax would revive the real estate market and lead to greater tax revenues in general.

Under the comprehensive real estate tax, the tax authority levies a 0.5 percent tax on the value of a home for owners of residences priced 600 million won or less, a 0.75 percent tax on houses priced between 600 million won and 1.2 billion won, and a 1 percent tax on houses between 1.2 billion won and 5 billion won.

The rates were cut by the Lee Myung-bak administration in 2009 to boost housing transactions. In 2005, they ranged from 1 percent to 3 percent. The Lee government intended to abolish the tax gradually.

According to the?National Tax Service, the comprehensive real estate tax collected 1.1 trillion won last year, which accounted for 0.6 percent of total tax revenues.?The revenue has dropped about 50 percent since 2008.

Hyun said revitalizing the real estate market was critical for economic growth in general.

“Increased transactions in the housing market will contribute to the economy, while it is also necessary to revive the economy in order to boost the housing market,” the minister said.

Analysts view such moves by the government?as positive.

“The most important thing to boost the housing market is to increase transactions and the number of people who would want to buy houses,” said Kim Kwang-seok, a research fellow at Hyundai Research Institute. “Regulations like the comprehensive tax, which was originally introduced to contain speculation in the market, are no longer needed.”

Kim said there is no need to worry about shortfalls in tax revenues.

“Increasing transactions is more important than maintaining high tax rates?in order to expand the tax revenue,” he said. “As proven in July when the acquisition tax cut ended, people are not buying houses because of high tax rates.”

According to the Ministry of Land, Infrastructure and Transport, housing transactions stood at 32,355 in July, down 36 percent from the same month last year.

In June, with the acquisition tax cut still in effect, the figure hit 129,907, the highest monthly number in six years.

Experts refer the plunge in transactions as a “transaction cliff.”

Meanwhile, the Finance Ministry decided not to build a duty-free mall in the arrival area of Incheon International Airport.

There have been five attempts to revise the customs law to create the mall since 2003 when lawmaker Ahn Hyo-dae proposed the bill. All of them failed.

“It is unfair for well-off people to not pay taxes after traveling, while people who cannot afford overseas trips still have to pay the taxes,” Hyun said.

BY song su-hyun [ssh@joongang.co.kr]