In 2022, Los Angeles voters accredited Measure ULA, a switch tax on the sale of high-value properties inside the 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 suggested suspending it after the wildfires. The mayor is true to fret. Property values in Pacific Palisades typically high $5 million, creating concern that the tax might penalize house owners who misplaced the whole lot 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 residence buildings, places of work, soundstages, resorts and procuring facilities — locations Angelenos dwell, work and store.
Moreover, ULA just 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 because the COVID-19 pandemic may promote it for $15 million and incur an $825,000 ULA tax, regardless of the proprietor’s total loss. Alternatively, somebody who purchased a home 10 years in the past for $500,000 and sells right now for $1.5 million would pay nothing. ULA’s design means massive losses could also be closely taxed whereas massive 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 sturdy incentives for house owners to keep away from the tax.
The best technique to keep away from the tax is to not promote, and our research exhibits that over the primary two years since ULA was applied, 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. Increased rates of interest and development prices aren’t in charge for the decline — these circumstances affected your complete area. And whereas there was a brief “rush to promote” earlier than ULA was applied, 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 elevate $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 massive gross sales, furthermore, ULA has slowed the manufacturing of market-rate residences. 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 embrace some income-restricted reasonably priced residences supplied by builders in alternate for elevated challenge dimension, Los Angeles is getting fewer of these, too. Conservatively, we estimate ULA is costing the town greater than 1,900 new models a yr, of which at the very least 160 would have been reasonably priced models produced with out public funding. In the meantime, the ULA income collected from newer multifamily tasks because the tax went into impact is just sufficient to subsidize, at finest, half that quantity. ULA’s poor design needlessly prices the town reasonably priced housing.
The affect doesn’t cease at housing. ULA has additionally slowed large transactions for business, industrial and workplace properties. This impact, mixed with the slowdown in residential transactions, is impeding property tax development. Below 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 massive transactions means much less funding for all public companies and applications that depend on L.A.’s tax base: colleges, neighborhood schools and the county and its safety-net applications.
Though the poll language for Measure ULA included sturdy limits on the Metropolis Council’s energy to amend it, ULA is fixable. The simplest method could also be state motion. State governments nearly all the time have the ability 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 cut back ULA’s unfavorable results whereas preserving its aim of elevating funds to assist low-income renters. Choices embrace 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 bought or improved in a few years; gross sales of those properties are more likely to symbolize a big windfall for sellers and such gross sales wouldn’t are likely 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 presently structured, makes that steadiness tougher to realize. It might turn into a greater software — one which fulfills voters’ hopes for extra reasonably priced housing, strengthens the native economic 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 Heart for Regional Coverage Research. Shane Philips is housing initiative challenge supervisor on the Lewis Heart. Jason Ward is co-director of the Rand Heart on Housing and Homelessness.
