April 1 marked the one-year anniversary of Measure ULA taking effect in the city of Los Angeles, and by any measure, the misleadingly named “mansion tax” is a disaster.
Placed on the November 2022 ballot as a citizens’ initiative, Measure ULA was sold to voters as a tax on the sale of mansions to provide programs for homelessness and the prevention of homelessness. Voters were told it would raise $600 million to $1.1 billion annually. Most voters probably thought they’d never have to pay any part of that.
Wrong on all counts.
Measure ULA is a real estate transfer tax on properties valued over $5 million. The tax rate is 4% of the sale price (or value at time of transfer) up to $10 million. Above that, the tax rate jumps to 5.5%. Even properties in foreclosure are subject to the tax on the sale price.
The luxury home market in Los Angeles saw a sharp decline in the number of sales during Measure ULA’s first year. Many owners rushed to sell before the tax took effect, but even so, the steep drop of nearly 70% in the 12 months since the tax took effect may have taken city officials by surprise. Only 125 homes priced over $5 million sold in L.A. since April 1, 2023, compared to 416 in the previous 12-month period.
As of March 8, according to the city controller’s office, Measure ULA has brought in just $173.6 million, about a quarter of what the city had estimated.
Because the tax is collected on all real estate sales and transfers, Measure ULA has discouraged the development of multi-family housing, including affordable housing projects. Commercial sales also have slowed. To the extent that the tax prevents the construction of new apartments and raises the cost of commercial real estate transactions, tenants and consumers feel the financial impact in higher rents and prices.
The good news is that Measure ULA actually is an unconstitutional tax, and it could be thrown out two different ways.
Proposition 13, passed by voters in 1978, contained a prohibition on real estate transfer taxes. Court rulings later interpreted away some of this protection, declaring that transfer taxes were legal if the revenue was used for general purposes. Measure ULA, however, is a “special tax,” meaning the revenue is earmarked for specific types of programs.
The Howard Jarvis Taxpayers Association, where I am on staff as Vice President of Communications, is suing to have Measure ULA invalidated as an illegal tax. HJTA’s attorneys pointed out that in addition to the prohibition in the state constitution, the L.A. city charter prohibits voters from enacting by initiative anything that the city itself is prohibited from doing.
An L.A. Superior Court judge found that argument unconvincing, but HJTA has filed a notice of appeal, so the constitutional issues will get another hearing later this year. If the tax is thrown out in court, anyone who paid it can seek a refund.
The second way that Measure ULA could be thrown out involves a different part of Proposition 13. The historic taxpayer protection initiative requires a two-thirds vote of the electorate for local special taxes, but state courts recently have eroded that protection, too.
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In 2017, the California Supreme Court suggested, without really deciding, that if a special tax increase was put on the ballot by a citizens’ initiative, perhaps the constitution didn’t apply, and a two-thirds vote wasn’t necessary. “Citizens’ initiative” special tax increases began to pop up in cities throughout the state, and appellate courts have, so far, allowed them to pass with just a simple majority vote.
Measure ULA passed with 57.7%.
An initiative that has qualified for the November ballot, the Taxpayer Protection and Government Accountability Act, would restore the two-thirds vote for local special taxes proposed by initiative. It would require Measure ULA and similar citizens’ initiative tax increases to go back on the ballot within one year. They would need a two-thirds vote to pass.
Outrageously, Gov. Gavin Newsom and the Legislature are suing to have the Taxpayer Protection and Government Accountability Act removed from the ballot.
The California Supreme Court will decide by June 27 if it stays or goes.
Write Susan@SusanShelley.com and follow her on Twitter @Susan_Shelley
