In 2022, Los Angeles voters accredited 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 packages.
ULA’s tax is paid by sellers, which can clarify why Mayor Karen Bass advised suspending it after the wildfires. The mayor is correct to fret. Property values in Pacific Palisades typically high $5 million, creating concern that the tax may penalize house owners who misplaced all the pieces and simply need 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 almost each property priced over $5 million, together with condo buildings, places of work, soundstages, motels and buying facilities — locations Angelenos reside, work and store.
Moreover, ULA isn’t a tax on revenue. It’s primarily based on sale value. Thus, the proprietor of an workplace constructing that has plunged 90% in worth for the reason that COVID-19 pandemic may promote it for $15 million and incur an $825,000 ULA tax, regardless of the proprietor’s general 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 giant losses could also be closely taxed whereas large beneficial properties go scot free.
Measure ULA additionally has steep “cliffs” — thresholds the place small value will increase set off large 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 best method to keep away from the tax is to not promote, and our analysis exhibits 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 situations affected the whole area. And whereas there was a short lived “rush to promote” earlier than ULA was carried out, our evaluation accounts for that habits. The 50% drop is an impact of ULA particularly.
Depressed gross sales imply much less income generated by ULA. Backers estimated ULA would increase $600 million to $1.1 billion yearly. To this point, collections have averaged simply $288 million per yr — lower than half the bottom projections.
By decreasing giant gross sales, furthermore, ULA has slowed the manufacturing of market-rate flats. Most multifamily developments contain shopping for an appropriate website 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 reasonably priced flats supplied by builders in alternate for elevated venture dimension, 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 at the least 160 would have been reasonably priced items produced with out public funding. In the meantime, the ULA income collected from newer multifamily initiatives 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 reasonably priced housing.
The impression doesn’t cease at housing. ULA has additionally slowed giant transactions for business, industrial and workplace properties. This impact, mixed with the slowdown in residential transactions, is impeding property tax development. Beneath California’s property tax system, native revenues enhance primarily when properties are reassessed at sale. Massive transactions contribute disproportionately to that development. 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 large transactions means much less funding for all public companies and packages that depend on L.A.’s tax base: faculties, neighborhood faculties and the county and its safety-net packages.
Though the poll language for Measure ULA included robust limits on the Metropolis Council’s energy to amend it, ULA is fixable. The best method could also be state motion. State governments virtually all the time have the facility to revoke or amend native actions, and switch taxes are arguably a difficulty of curiosity to the state, as a result of they’ve direct results on California’s housing targets and general fiscal well being.
Focused state laws may scale back ULA’s detrimental results whereas preserving its purpose of elevating funds to assist low-income renters. Choices embody proscribing the tax to single-family houses (making it a real mansion fax), adopting marginal charges to eradicate 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 better from the January wildfires. Meaning balancing the pressing want for brand spanking new income with insurance policies that encourage new housing and jobs. Measure ULA, as at present structured, makes that steadiness tougher to realize. It may develop into a greater device — one which fulfills voters’ hopes for extra reasonably priced housing, strengthens the native financial system and protects the social and monetary basis of the area.
Michael Manville is a professor of city planning at UCLA and an affiliated scholar at its Lewis Heart for Regional Coverage Research. Shane Philips is housing initiative venture supervisor on the Lewis Heart. Jason Ward is co-director of the Rand Heart on Housing and Homelessness.
