The Unintended Consequences of Measure ULA

A New Perspective on Property Taxation in Los Angeles

New research has shown that Measure ULA, aimed at promoting affordable housing, might be counterproductive. By imposing a 4% tax on property sales over $5 million (5.5% for sales above $10 million), it significantly hinders transactions essential for housing development.

Reassessing the “Mansion Tax”

Many believe Measure ULA targets mansions. However, most affected transactions involve apartments, commercial properties, and industrial sites. These assets, rather than luxurious homes, face the brunt of the tax. The researchers, Michael Manville and Mott Smith, contend that this broad application misses its mark.

The Impact on Property Transactions

A Decline in Sales

Since ULA’s implementation, sales of apartment buildings, commercial, and industrial properties have plummeted by 30-50%. The tax’s reach forces potential sellers to either lower prices below $5 million or hold onto their properties.

Property transactions in neighboring cities without the tax saw steadier numbers, highlighting ULA’s role in this decline. Reduced transactions mean fewer opportunities for new housing.

The Toll on Public Revenue

A drop in property sales leads to less reassessment under Prop 13. Consequently, public services face a $25 million annual shortfall. Schools and local services particularly feel the pinch.

Challenges for Housing Development

Financial Hurdles for Builders

Developers face steep challenges as they must lower their land offers to accommodate potential tax burdens. For a typical $6 million site, builders cut bids by $1.7 million. This makes them less competitive than non-housing buyers.

A Shrinking Inventory for Development

Properties once selling above $5 million now seldom meet that mark. Many owners strategically price properties to avoid taxes, hindering the supply of land for potential housing development.

Proposed Reforms

To align Measure ULA with its original goals, researchers suggest several reforms:

• Exempt non-single-family properties to maintain the “mansion tax” spirit.
• Eliminate tax for properties reassessed within the last 20 years.
• Apply tax rates marginally rather than on the entire sale amount.
• Introduce a lower tax rate for transactions over $2 million.
• Exempt developers focusing on affordable housing.

These measures could balance funding for affordable housing without stifling development.

Conclusion

The ambitions of Measure ULA clash with its practical outcomes. While intended to fund affordable housing, it inadvertently suppresses essential property transactions. By refining its scope and application, Los Angeles might better foster both housing development and affordable living solutions.

For further insights, explore the detailed analysis here.