When first proposed, the idea behind a property tax was to combine the value-added tax on land, fees from land sales and land use tax into one tax that would be collected annually.

Because the possibility of issuing a property tax has coincided with the expansion of the real estate market, some experts naturally believe it will be an effective tool in lower housing prices. Some have even calculated the reduced cost developers will face due to the simplification of the current tax system and the corresponding drop in housing prices that would follow.

But the fact is, even with a reduction of costs, property developers will not necessarily pass on their savings to home-buyers.

When we look at how property taxes have been implemented in other countries, the tax is principally regarded as a source of revenue for local governments and is not seen as being a mechanism by which to control housing prices.

According to a source who has seen a draft of the property tax proposal, currently, only the urban land use tax and real estate tax will be merged to create the new property tax. Other taxes such as land transfer fees and the arable land occupation tax have not been included.

"This kind of property tax has already seriously distorted" the source said.

With the property tax bogged down in negotiations, to what extent will the introduction of a real estate tax influence housing prices.

For those investors who own many or perhaps even dozens of properties, the property tax will increase the cost of owning a property, perhaps forcing them to sell their property, thus leading to a drop in housing demand which may well lead to a drop in prices.

However, an official with the Finance Bureau of Beijing explained, Chinese tax policies are neutral and are more about providing revenue than having an obvious effect on prices. He went on to add that policies related to bank lending had a larger effect on housing prices.

Though it is unknown how big of an influence the new real estate tax will bring have on housing prices, there is no doubt that it will increase the revenue of local governments.

China has long been intent on introducing a tax on assets that will serve as the third major source of fiscal revenue in the future. Such a tax would really just be aimed at fixed-assets (不动产税), a combination of both a property and real estate tax.

Currently, taxes on fixed assets only account for a small portion of all fiscal revenue. In most other countries, taxes on fixed assets are the main source of government revenue and the main source of this income is residential housing.

After this latest wave of government-led investment, local governments are now suffering from a serious shortage of funds, which has led to them using various methods to raise capital.

"There is little possibility that any of the existing taxes that local government's rely on could become a main source of revenue for them, only a real estate tax can do it. If residential houses not being used to generate profits are not added to the pool of properties paying real estate tax, the scope of the revenue raised won't be so large," according to an academic who specializes in taxation.

The real estate tax brought in a revenue of over 80 billion yuan for the Chinese government in 2009. If non-profit-generating residential houses are added to the tax, there will be a significant increase in revenue.

A ministry official said, without being applied to residential property, the tax can not be meaningfully described as being a real estate tax. If owner-occupied residential properties are included in the tax, it will undoubtedly become a major component of China's taxation system.

He said, currently China's urbanization ratio is at 50 percent and will reach 60 percent within ten years.

The amount of people included in this 10 percent increase in urban population is equal to the population of a moderate sized country.

With a large number of rural residents pouring into cities, the demand for housing will greatly increase, creating a huge rise in real estate tax income which can serve as a major source of revenue for local governments, especially at county or district levels.

This article was edited by Rose Scobie and Paul Pennay