Why LA’s ‘mansion tax’ is the best argument for statewide tax reform

Later this week, proponents of the Local Taxpayer Protection Act to Save Prop. 13  initiative will submit over 1 million signatures to county election officials throughout California. The measure, if approved by voters, will restore the letter and spirit of Proposition 13 in two important ways.

First, it reverses the court-created loophole in the two-thirds vote requirement that has allowed special interest groups to easily impose their own tax hikes using the local initiative process. Second, it will restore Prop. 13’s ban on real estate transfer taxes that steal the equity of homeowners when they sell their property.

The Local Taxpayer Protection Act has been necessitated by a series of court decisions contrary to clear language in voter-approved taxpayer protections set forth in Proposition 13 (1978) as well as  Proposition 218, The Right to Vote on Taxes Act (1996). Despite the letter and the intent of the law, the California judiciary has been openly hostile to the interests of taxpayers.

The fallout from these decisions came to a head with the imposition of the City of Los Angeles’ infamous ULA tax. Measure ULA (“United to House LA”), commonly known as the “mansion tax,” is a Los Angeles city tax on high-value real estate transactions that took effect on April 1, 2023. It imposed a 4% tax on property sales between $5 million and $10 million, and 5.5% on sales over $10 million, in addition to existing transfer taxes. Revenue generated by ULA is earmarked for affordable housing development and tenant assistance programs.

The ULA tax contained both evils the Local Taxpayer Protection Act will correct: First, the levy was a special tax – imposed for a specific purpose – which should have required a two-thirds vote of the local electorate. Second, the levy was a massive increase in local real estate transfer taxes which, under the plain language of Proposition 13, are expressly prohibited.

In addition to the clear inconsistency of ULA with popular tax reform initiatives, other problems with ULA are now coming to light. The timing of these revelations bodes well for framing the statewide political campaign to pass the Local Taxpayer Protection Act.

The primary flaw in the ULA tax, and the most obvious, was its characterization as a “mansion tax.” The realization that the tax is imposed on the sale of all properties over the $5 million threshold including apartments, commercial and industrial properties, led almost immediately to buyer’s remorse among the city’s political elite.

For example, City Councilmember Nithya Raman — who supported Measure ULA when it was on the ballot — recently called for changes to the tax, noting the significant “unintended consequences” which have produced outcomes exactly opposite from what the ULA was supposed to address, the city’s infamous crisis with homelessness.

Raman’s observations are spot on and confirmed by several housing experts and academic studies. Shawn Regan, senior fellow at the Manhattan Institute writing in City Journal, notes that, “Measure ULA has both raised less revenue than promised and discouraged the kinds of property transactions that make new housing possible, including new multifamily units. In trying to tax its way to affordability, L.A. has worsened its housing shortage.”

Likewise, a study from the Lewis Center for Regional Policy Studies at UCLA found that the ULA tax “impedes the trade in commercial, industrial and multifamily property. In doing so it jeopardizes L.A.’s ability to build new housing, revitalize struggling commercial and industrial properties, and raise property tax revenue.” More specifically, the study found “that Measure ULA is reducing multifamily housing production in Los Angeles by at least 1,910 units per year — an 18% decline, relative to the 2020–2022 average, among projects with 20 or more units.”

Finally, a study reported by the Cato Institute entitled “The Effect of the Los Angeles Mansion Tax on Property Tax Revenue” notes the reduction in revenue due to ULA’s impediment of property transactions. “Our research estimates the effect of Measure ULA on the frequency of property transactions, the property tax base, and property tax revenue using detailed property records from 2020 to 2025. Our estimates suggest that Measure ULA reduced the transaction rate of eligible properties by 38 percent and that between 63 and 138 percent of the revenue raised by Measure ULA was offset by lower future property tax revenue.”

Backers of ULA cannot deny that the measure has fallen far short of its promises to the voters and has also exacerbated L.A.’s homelessness crisis. This could very well create a hostile political environment for progressives in November.

As reported by Ben Christopher writing for CalMatters, “There’s growing concern, both in Los Angeles and among Democrats in Sacramento, that ULA as it currently exists has become a political vulnerability — and one that could fuel the campaign behind the statewide tax busting measure.”

That’s good news for Californians who support Proposition 13.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.