Los Angeles’ new "mansion tax," designed to fund affordable housing, is reportedly causing a significant decline in apartment construction in the city. A recent study from UCLA and the Rand Corporation suggests that this tax is making it harder for developers to profit, leading to a drop in new housing developments and potentially worsening the city’s ongoing housing crisis.
Measure ULA, which took effect in the spring of 2023, imposes a 4% tax on property sales over $5 million and a higher 5.5% tax on sales above $10 million. Although supporters argue that the tax helps fund essential housing projects, real estate professionals claim it adds extra costs that deter investment in new developments.
The study estimates that Measure ULA is responsible for a loss of nearly 1,910 apartment units each year. This includes a reduction of at least 168 affordable housing units annually, as many apartment projects are tied to density bonuses that require developers to include income-restricted housing.
Shane Phillips, a co-author of the report and project manager at UCLA’s Lewis Center for Regional Policy Studies, emphasized that building less housing will only make the city more unaffordable. The study also highlights a broader trend: housing permits are down across the country, driven by rising interest rates and construction costs. However, the report indicates that the decline in land sales in Los Angeles is more pronounced than in other areas without increased transfer taxes.
Supporters of Measure ULA have pointed to rising costs as a reason for the slowdown in construction, arguing that it is not solely the tax’s fault. They also mention that some investors are waiting to see how legal challenges to the measure unfold. Despite the concerns from the real estate sector, ULA has raised nearly $633 million in its first two years, funding rental assistance for 11,000 residents and contributing to the construction of 795 affordable homes.
Critics of the tax, including Rand economist Jason Ward, argue that the measure’s impact extends beyond luxury home sales. They note that it discourages landowners from selling their properties, limiting opportunities for new construction. Developers who plan to sell their completed projects may face additional taxes, which could affect their financial arrangements with lenders.
In light of these findings, the report’s authors are calling for adjustments to Measure ULA to mitigate its negative effects on housing construction. They suggest that exempting multifamily projects built within the last 15 years could reduce ULA revenue by only 8% while encouraging more development.
As Los Angeles grapples with its housing crisis, the debate over the mansion tax continues. The challenge remains to balance the need for affordable housing funding with the urgency of increasing the overall housing supply in the city.