In 2022, Los Angeles voters authorised Measure ULA, a switch tax on the sale of high-value properties inside town limits. Nicknamed the mansion tax by its supporters, Measure ULA imposed a 4% tax on gross sales over $5 million and a 5.5% tax on gross sales over $10 million — one of many steepest such levies within the nation. Its income is earmarked for low-income housing applications.
ULA’s tax is paid by sellers, which can clarify why Mayor Karen Bass steered suspending it after the wildfires. The mayor is true to fret. Property values in Pacific Palisades usually high $5 million, creating concern that the tax might penalize house owners who misplaced all the pieces and simply wish to promote and transfer on. However Measure ULA’s issues run deeper. Suspended or not, it must be reformed.
Regardless of its nickname, ULA isn’t only a tax on mansions. It applies to just about each property priced over $5 million, together with condo buildings, workplaces, soundstages, lodges and purchasing facilities — locations Angelenos dwell, work and store.
Moreover, ULA isn’t a tax on revenue. It’s based mostly on sale worth. Thus, the proprietor of an workplace constructing that has plunged 90% in worth for the reason that COVID-19 pandemic would possibly promote it for $15 million and incur an $825,000 ULA tax, regardless of the proprietor’s total loss. However, somebody who purchased a home 10 years in the past for $500,000 and sells at the moment for $1.5 million would pay nothing. ULA’s design means massive losses could also be closely taxed whereas huge features go scot free.
Measure ULA additionally has steep “cliffs” — thresholds the place small worth will increase set off huge tax will increase. A property promoting for $5 million incurs no ULA tax, however one promoting for a greenback extra pays $200,000. Such cliffs create robust incentives for house owners to keep away from the tax.
The simplest method to keep away from the tax is to not promote, and our analysis reveals that over the primary two years since ULA was carried out, high-value property gross sales within the metropolis fell by about 50% — a far steeper decline than elsewhere within the county throughout the identical interval. Larger rates of interest and development prices aren’t in charge for the decline — these circumstances affected all the area. And whereas there was a short lived “rush to promote” earlier than ULA was carried out, our evaluation accounts for that conduct. The 50% drop is an impact of ULA particularly.
Depressed gross sales imply much less income generated by ULA. Backers estimated ULA would elevate $600 million to $1.1 billion yearly. Thus far, collections have averaged simply $288 million per yr — lower than half the bottom projections.
By decreasing massive gross sales, furthermore, ULA has slowed the manufacturing of market-rate flats. Most multifamily developments contain shopping for an appropriate web site after which promoting the completed constructing. ULA can add considerably to the price of each of these transactions. And since most market-rate housing developments now embody some income-restricted inexpensive flats offered by builders in alternate for elevated mission measurement, Los Angeles is getting fewer of these, too. Conservatively, we estimate ULA is costing town greater than 1,900 new items a yr, of which a minimum of 160 would have been inexpensive items produced with out public funding. In the meantime, the ULA income collected from newer multifamily tasks for the reason that tax went into impact is barely sufficient to subsidize, at finest, half that quantity. ULA’s poor design needlessly prices town inexpensive housing.
The influence doesn’t cease at housing. ULA has additionally slowed massive transactions for industrial, industrial and workplace properties. This impact, mixed with the slowdown in residential transactions, is impeding property tax progress. Underneath California’s property tax system, native revenues enhance primarily when properties are reassessed at sale. Giant transactions contribute disproportionately to that progress. Gross sales over $5 million are solely 4% of all transactions however account for greater than 40% of the expansion within the metropolis’s tax base. Over time, fewer huge transactions means much less funding for all public companies and applications that depend on L.A.’s tax base: colleges, group faculties and the county and its safety-net applications.
Though the poll language for Measure ULA included robust limits on the Metropolis Council’s energy to amend it, ULA is fixable. The simplest strategy could also be state motion. State governments nearly all the time have the facility to revoke or amend native actions, and switch taxes are arguably a problem of curiosity to the state, as a result of they’ve direct results on California’s housing objectives and total fiscal well being.
Focused state laws might scale back ULA’s destructive results whereas preserving its objective of elevating funds to assist low-income renters. Choices embody limiting the tax to single-family houses (making it a real mansion fax), adopting marginal charges to get rid of the “cliffs” (to work equally to earnings taxes ), or limiting ULA to properties that haven’t been offered or improved in a few years; gross sales of those properties are more likely to signify a big windfall for sellers and such gross sales wouldn’t are inclined to undermine housing and job creation.
Los Angeles wants housing and financial insurance policies that work — particularly as we get well from the January wildfires. Meaning balancing the pressing want for brand new income with insurance policies that encourage new housing and jobs. Measure ULA, as at present structured, makes that steadiness tougher to attain. It might develop into a greater instrument — one which fulfills voters’ hopes for extra inexpensive housing, strengthens the native financial system and protects the social and financial basis of the area.
Michael Manville is a professor of city planning at UCLA and an affiliated scholar at its Lewis Middle for Regional Coverage Research. Shane Philips is housing initiative mission supervisor on the Lewis Middle. Jason Ward is co-director of the Rand Middle on Housing and Homelessness.
