In 2022, Los Angeles voters passed Measure ULA, a new tax aimed at high-end property sales within the city. Often called the mansion tax, this measure imposes a 4% tax on properties sold for over $5 million and a 5.5% tax on those sold for more than $10 million. The revenue generated from this tax is intended to fund low-income housing programs.
Recently, Mayor Karen Bass raised concerns about the impact of this tax, especially in light of the recent wildfires that devastated parts of the city. Many homeowners in areas like Pacific Palisades could face significant tax burdens if they need to sell their properties after suffering losses. This situation highlights broader issues with Measure ULA that need addressing.
One major concern is that the tax applies not just to luxury homes, but to a variety of properties, including commercial buildings and apartment complexes. This means that sellers of these properties could face hefty taxes even if their overall financial situation has worsened. For example, someone selling an office building for $15 million after a significant drop in its value could incur an $825,000 tax, while someone who bought a home for $500,000 and sells it for $1.5 million would pay nothing.
The structure of the tax also creates steep cliffs, where even a small increase in sale price can lead to a massive tax hike. A property selling for $5 million incurs no tax, but a sale at $5,000,001 would trigger a $200,000 tax. These abrupt changes can discourage property sales altogether.
Data shows that since the implementation of Measure ULA, high-value property sales in Los Angeles have decreased by about 50%. This decline is sharper than the overall market trends in the region, suggesting that the tax is a significant factor. As a result, the city is generating less revenue than anticipated. Initial estimates suggested that ULA could raise between $600 million and $1.1 billion annually, but actual collections have averaged around $288 million per year.
This drop in sales is also hindering the construction of new market-rate apartments. Many developers rely on selling properties to finance new projects. The additional costs imposed by ULA can make these developments less feasible, leading to fewer new housing units being built. Estimates indicate that the tax may be costing the city over 1,900 new units each year.
Moreover, the tax is affecting the overall growth of the city’s tax base. Large property transactions, which make up only a small fraction of all sales, provide a significant portion of revenue for local services, including schools and public safety programs. With fewer high-value sales, the funding for these essential services may suffer.
Although Measure ULA was designed with strict limits on amendments, experts believe it can still be improved. State intervention could provide a solution, as state governments often have the authority to modify local measures. Possible changes could include limiting the tax to single-family homes or adopting a tiered tax rate to eliminate the drastic cliffs.
As Los Angeles continues to recover from the wildfires, the city must find a balance between generating revenue for affordable housing and fostering an environment that encourages property sales and development. With some adjustments, Measure ULA could better serve its intended purpose of supporting low-income renters while also promoting economic growth in the region.