Regulatory Tax, Land, and Housing Markets: Theory and Evidence from China

Abstract

Supply-side constraints are important drivers of land and housing market dynamics. This paper proposes a new “regulatory tax” measure to capture different taxes, fees, and administrative costs incurred during real estate development. Based on a spatial equilibrium framework, I find that in response to higher taxes and fees, developers bid less for land plots and reduce housing construction, leading to higher housing prices. Empirically, this paper spatially matches 13,987 residential projects with the corresponding land plot transaction records in China, and exploits rich information on house sales, land prices, construction costs, and developer profits to estimate regulatory taxes. I find that regulatory tax accounts for, on average, 38% of house price and varies substantially across 281 cities in China. Exploiting exogenous variations generated from historical local government tax enforcement and a panel of Chinese cities between 2008 and 2024, I show that regulatory taxes push up housing prices and reduce housing construction, especially in superstar cities. These taxes also discourage land supply and land sale revenues. Eventually, new homebuyers (due to house price appreciation) and local governments (due to reduced land sales and construction activities) would need to bear the costs of excessive regulations and taxes.