Xi Faces Pushback on China’s Bid to Tax Property

China has experimented with a tax on some properties in just a couple of cities during the past decade. Earlier this year, Mr. Xi assigned to Han Zheng, the most senior of China’s four vice premiers, the task of rolling out the levy much more widely, these people say.

But Beijing is now settling for a limited tax plan because of strong pushback, while a proposal involving state-provided affordable housing is emerging as an alternative.

Mr. Xi’s efforts to tame a market that has been in an extended boom for four decades has already sent shock waves across the Chinese economy and global markets. He has shown little mercy to China Evergrande Group, even as the heavily indebted property developer teeters on default. Other private developers that have binged on debt are also being squeezed. Home sales are falling and banks are pulling back on new lending. The impact from property tightening contributed to a sharp slowing in China’s growth in the third quarter.

China’s property bubble has gotten bigger over the years. Home prices have consistently risen faster than actual economic growth, driving more credit into real-estate speculation, further pushing up property values. Authorities in recent years have repeatedly tried to break the vicious cycle with various tightening measures only to loosen them whenever growth appears threatened.

Now, Mr. Xi appears bent on putting in practice his slogan: “Housing is for living, not for speculation.”

However, in internal debates, the feedback to his property-tax plan from both the party’s elites and its rank-and-file members has been overwhelmingly negative, say the people familiar with the deliberations.

Arguments against the tax, which would be levied annually on the value of a property, have flooded in since the ministries of finance, housing and taxation started to seek feedback to the tax proposal in the spring. Many officials contend that such a levy could crush housing prices, cause consumer spending to plunge and severely harm the overall economy.

The pushback on the tax is one sign that taking on a sector that perhaps more than any other defines modern China carries risks for Mr. Xi—of both alienating Chinese households and sowing dissent within the party.

More than 90% of urban Chinese families own their homes, and property-related industries account for nearly a third of the country’s output. Meanwhile, up to 80% of China’s household wealth is tied up in real estate; a drop in property values could make homeowners feel poorer and less willing to spend.

Press offices for China’s State Council, the top government body, and the ministries of finance, housing and taxation didn’t respond to questions.

Some retired senior party members also petitioned against imposing the new tax, saying they themselves couldn’t afford to pay any additional taxes. “So many people, including party members, own more than one property,” said one of the people familiar with the deliberations. “The tax proposal is becoming a potential social-stability issue.”

Citing fears of the broader fallout, Mr. Han, the vice premier tasked with the rollout, has recommended to Mr. Xi against imposing the levy too widely for now, say the people familiar with the deliberations.

An initial proposal to test-run the tax in some 30 cities has been scaled back to just around 10. Officials are still haggling over how to set the tax rate for the pilot initiative and whether to offer discounts and exemption areas. A new law aimed at advancing the tax across the country likely won’t be finalized until around 2025, the last year of the current five-year development plan, the people said.

One idea under discussion is to gradually test the tax plan in big cities, including Shanghai and the sprawling municipality of Chongqing in central China, which both have levied an annual charge on second homes or high-priced ones since 2011. Other places under discussion include the southern boomtown of Shenzhen and the province of Hainan, both designated by Mr. Xi as the testing ground for building a socialist market economy.

The city of Hangzhou, in the wealthy province of Zhejiang, is also expected to join the tax-pilot program, according to the people. The eastern province, home to the business empire of Jack Ma, the beleaguered Chinese tech star, has already been named as a place to pilot Mr. Xi’s policies aimed at reducing inequality.

In a sign that Mr. Xi has come to terms with the less-aggressive proposal that centers on limited trial runs of the tax, he wrote in an article published in the Oct. 16 issue of the party’s top theoretical journal, Qiushi, “We should actively and steadily promote the legislation and reform of real-estate tax, and do a good job in the pilot work.”

Meanwhile, local governments, which get roughly a third of their revenue from selling land to property developers, worry that a property tax would cause demand for land to drop and hurt their revenues, which amounted to more than $1 trillion last year.

Already, with developers’ ability to access financing severely curtailed, land transactions and sales revenues in China are falling by record margins, according to research firm Rhodium Group. In the southern city of Guangzhou, for instance, the government sold less than half of the 48 parcels of land offered in a late September auction, and only five parcels sold above their asking price.

Based on transactions data from 100 cities, Rhodium’s analysis shows that land sales plunged 43% in the first three weeks of September from a year earlier. The drop is adding to the financial strains on many localities across the country.

Across other sectors, Mr. Xi’s campaign to squeeze what he sees as capitalist excesses out of the Chinese system has already cut into growth.

Sales, employment and other activities in the service sector, led by big tech companies hit hard by the policy tightening, have all slowed down in recent months. State banks and funds, faced with an intensive scrutiny into their ties with big private-sector players, are also pulling back.

“Beijing is clearly willing to risk rising economic costs, which raises questions about how far authorities will push the property sector,” said Logan Wright, Rhodium’s director of China markets research.

Mr. Xi hinted at the tensions his economic-cleanup effort could cause in a Sept. 1 speech, which some officials read as an attempt to prepare his party apparatchiks for tough times.

“Daring to struggle is the distinct character of our party,” Mr. Xi said during the speech at the Central Party School, the exclusive training ground for Communist leaders. “Starting a new journey of building a modern socialist country…[we] will not face fewer risks and tests than in the past.”

Chinese society has in the past four decades moved from the Maoist notion of people living in housing provided by their work units to a roller-coaster market. A less controversial alternative to the tax proposal centers on affordable housing provided by state firms.

Under this idea, China would essentially go back to a “dual-track” system with government-subsidized housing offered alongside commercial housing. It was the initial direction for China’s housing reform that started in the late 1990s, according to government advisers, but over the years the effort had focused almost only on commercialization.

Now, some officials and advisers say, a return to such a system could help the leadership make China more equal. “What’s needed is to revisit the ‘dual-track housing system’ and let state-owned enterprises and companies controlled by the central government return to affordable housing,” Meng Xiaosu, former head of China’s housing reform research group, wrote in an online article last month.

A financing firm owned by the provincial government of Yunnan, in southwestern China, is among those that have sprung into action. The Yunnan government announced in late September that Yunnan Construction Investment Group will team up with state banks to expand the supply of affordable housing “with a high sense of mission and responsibility.”

Write to Lingling Wei at lingling.wei@wsj.com