Making LA’s Mansion Tax Work Better

April 2024 marked the one-year anniversary of the implementation of Measure ULA in the City of Los Angeles, also known as the “Mansion Tax”, which levies an additional 4% transfer tax on all real estate sales above $5 million and a 5.5% tax on all sales above $10 million. This tax is payable on all sales above these thresholds, residential or commercial, whether the sale results in a profit or not. This ballot measure was approved by voters in November 2022 and went into effect in April 2023 and thus far has not been as widely viewed as successful. Far less money has been raised than expected and it still faces legal challenges, as well as a potential repeal. According to the Los Angeles city controller’s office, Measure ULA raised $173.6 million through the end of Q1 2024, about a quarter of the city’s annual revenue estimate. Voters were initially told ULA would generate anywhere from $672 million to close to $1 billion annually, which would go towards homelessness prevention, tenant protection, and affordable housing programs. These are worthwhile objectives, and the money that was raised could start to benefit them. Rather than sticking with an unsuccessful program riddled with unintended consequences or repealing it altogether, might making certain changes to ULA help better achieve these goals?

Looking at the impact to real estate since ULA began, luxury home sales volume in Los Angeles dropped by 68% in the 12 months since the tax took effect. Sales volume for apartment buildings in the city over $5 million dropped a staggering 85% during that time. This evidence shows that the majority of people will make a different decision rather than purchasing or selling, or at least delay the sale of a property, when such a prohibitive cost is levied. In certain cases, the tax is avoided altogether through manipulation of the sales price and closing costs to sell for just under the tax thresholds. Considering it takes approximately $3.4 billion in sales above $5 million each to generate $173.6 million at the ULA tax rates, does this data show we are missing out on approximately $10 billion in sales volume annually from people avoiding selling to not have to pay this tax? The answer might not be this simple, and other factors including high interest rates have slowed real estate sales in recent times, however it is clear that avoidance of paying this tax is a strong motivating factor for buyers and sellers.

As I mentioned in the first paragraph, this tax is in addition to the .45% documentary transfer tax levied by the city on all real estate sales. If we use the $10 billion in lost sales figure, at this transfer tax rate, this is an annual loss of $45 million due to uncollected tax, more than a quarter of the amount that was actually raised by ULA in its first year. Additionally, I cannot begin to calculate lost revenue to the county from un-reassessed properties (that would have been sold at a higher price, but remain at their current under-market assessment value) as well as loss of income and sales tax revenue flowing through the economy from everyone who would have earned income and spent money from these transactions. The potential loss in tax revenue and economic impact from people’s overwhelming avoidance of paying this tax almost certainly outweighs the benefit from the revenue obtained by collecting a steep fee on a select few. A less steep and more graduated fee structure with a lower floor could be an alternative to significantly reduce tax avoidance and achieve similar or greater revenue without stealing from Peter to pay Paul.

The following structure would still raise a considerable sum for the important housing programs the city and the majority of voters support without disincentivizing as many people from selling or creating other unintended negative consequences. For example, start the ULA tax on sales of $1 and everything up to $1,000,000 receives a .1% tax, a barely noticeable $1,000 or less on tens of thousands of sales every year (there were 61,200 residential sales alone in Los Angeles in 2022, a slow year). $1,000,001 – $2,000,000 – .2%, $2,000,001 – $3,000,000 – .3%, and so on. A $20,000,000 sale would still pay 2% ($400,000), a hefty sum, but probably not prohibitive at that price. In a normal year without reduced demand, this structure would generate hundreds of millions of dollars for housing programs with a much smaller reduction in sales and its corresponding negative impact on potential property tax revenue, documentary transfer tax revenue, jobs, and the economy.

While the City of Los Angeles is making a well-meaning effort to improve conditions for those experiencing homelessness and lack of affordability for renters, this tax might be making the problem worse by disincentivizing developers from building large scale projects that could help with the housing shortage, which would improve supply and lower prices. Building and selling pretty much any apartment community over 15 units will trigger the tax, which can singlehandedly take a potential project from profitable to unprofitable. Even if developers decide to build and hold the property and refinance to take cash out, lenders will lend less money because they know they’ll need to pay the tax (or reduce the price commensurately) in the event of a foreclosure. For the projects that do get sold, it generally means higher costs for renters, as some of the buyer’s increased costs need to be passed along.

California voters can send Measure ULA back to the voters on a local level by passing the Taxpayer Protection Act in November 2024. The measure would require a two-thirds vote for tax measures to pass instead of a simple majority. If ULA is overturned, those who paid it could apply for a refund. In the meantime, some small changes to the measure are being made, such as increasing the thresholds to $5,150,000 and $10,300,000 starting in July 2024. In my opinion, it is not the tax itself that is the problem, it is the structure, and these changes, as well as potentially others, could go a long way towards solving the important issues the measure hoped to address with fewer unintended consequences that hinder those efforts.