LA's 'Mansion Tax' Squeezes Housing Market, Produces Less Housing, Study Finds
Measure ULA, intended to fund affordable housing, is instead suppressing property transactions and new construction, according to researchers.
Los Angeles enacted a tax on high-value property transactions, Measure ULA, with the stated goal of generating funds for affordable housing. However, research indicates the tax has inadvertently reduced housing construction and property sales.
Measure ULA, approved by voters in 2022, imposes a 4% tax on property sales above $5.4 million and a 5.5% tax on sales above $10.9 million, in addition to existing transfer taxes. Proponents projected the measure could facilitate the creation of over 26,000 affordable homes within a decade.
Contrary to its objectives, the tax has been described not as a "mansion tax" but as a tax on real estate transactions. Researchers Michael Manville of UCLA and Mott Smith of USC estimate that following the implementation of ULA, the likelihood of a Los Angeles property selling above the tax threshold decreased by up to 50%. Transactions involving commercial, industrial, and multifamily properties saw an estimated decline of 30% to 50%.
This reduction in transactions has also impacted housing construction. An econometric analysis cited by UCLA suggests that ULA has led to a 31% decrease in permits for multifamily projects of 20 units or more, translating to an estimated loss of approximately 1,900 housing units annually.
The tax's structure means that once a sale crosses the threshold, the tax applies to the entire sale price, not just the amount exceeding the threshold. This has made high-value property transactions more expensive, discouraging investment and potentially causing some housing projects to be re-evaluated or canceled.
Furthermore, the decrease in property sales has implications for local government revenue. Because California properties are typically reassessed upon change of ownership, Measure ULA is estimated to reduce property tax revenue by around $25 million annually, with losses expected to compound over time.
Meanwhile, the city of Los Angeles is utilizing funds collected from Measure ULA for affordable housing initiatives. However, a significant portion of the latest funding round is allocated to preserving existing affordable housing units rather than supporting new construction. Some of these funds are directed towards properties with documented issues, such as infestations and structural problems.
The policy's outcome, where a tax intended to boost housing production results in reduced construction and fewer transactions, has drawn criticism. The situation highlights concerns about the effectiveness and unintended consequences of real estate transaction taxes on the housing market.