In 2022, Los Angeles voters authorized 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 suggested suspending it after the wildfires. The mayor is true to fret. Property values in Pacific Palisades typically prime $5 million, creating concern that the tax may 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 just about each property priced over $5 million, together with residence buildings, workplaces, soundstages, motels and procuring facilities — locations Angelenos reside, work and store.
Moreover, ULA will not be 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 would possibly promote it for $15 million and incur an $825,000 ULA tax, regardless of the proprietor’s total loss. Then again, 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 giant losses could also be closely taxed whereas large positive aspects 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 best method to keep away from the tax is to not promote, and our research 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. Increased 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 conduct. 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 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 trade for elevated mission 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 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 because the tax went into impact is barely sufficient to subsidize, at greatest, half that quantity. ULA’s poor design needlessly prices town inexpensive housing.
The influence 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 progress. Below 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 large transactions means much less funding for all public businesses and applications that depend on L.A.’s tax base: colleges, neighborhood 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 virtually at all times 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 targets and total fiscal well being.
Focused state laws may scale back ULA’s destructive results whereas preserving its aim of elevating funds to assist low-income renters. Choices embody limiting the tax to single-family properties (making it a real mansion fax), adopting marginal charges to remove the “cliffs” (to work equally to revenue 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 characterize 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 recuperate from the January wildfires. Which means 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 more durable to attain. It may turn out to be a greater device — 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.
