California is proving once again that if you can’t be a good example, you can always serve as a horrible warning.
The latest release from our nation’s laboratory of self-destruction is the monstrously large tax on high-value real estate sales in Los Angeles known as Measure ULA.
Proponents called it a “mansion tax” and a 2022 UCLA study estimated that it would raise approximately $923 million per year.
The measure goes into effect this weekend.
The law – which was approved by 58 percent of Los Angeles voters in November – states that nearly all resulting revenue must be spent on “affordable housing and tenant assistance programs.”
Proponents insisted that the measure would “reduce homelessness.”
However, Measure ULA does not allow any of those tax dollars to be spent on things like emergency shelters or temporary housing.
The “mansion tax” doesn’t apply only to luxury single homes, but also to apartment buildings and commercial properties – any real estate sale or transfer in the city of Los Angeles valued at more than $5 million.
The tax is a flat four percent on properties worth between $5 million and $10 million; above $10 million, that figure jumps to 5.5%.
Every dollar of property value is taxed, not just the value that exceeds those thresholds. And the tax must be paid at the close of escrow regardless of whether the seller makes a profit or loss.
Even before it went into effect, Measure ULA was having a negative impact on housing construction in the city. According to a February report in The Real Deal, lenders had begun pulling “back from making construction loans on ground-up multifamily projects” in L.A. after the tax was approved in November. This week, the city itself estimated that revenue from the tax would be 25% lower than expected.
A huge tax increase to fund more housing construction is having the opposite effect. How did this happen?
Measure ULA is the by-product of California’s venerable initiative process – which enables voters to write and enact laws – along with a few offhand remarks in a cannabis-related 2017 state Supreme Court decision.
By a plain reading of the state constitution, real estate transfer taxes like Measure ULA are flatly prohibited in California.
That was part of Proposition 13, the legendary 1978 initiative that sharply limited increases in property taxes.
Lest politicians try to sneak in other types of levies, Proposition 13 also banned real estate transfer taxes as well as new property taxes based on value.
It also required a two-thirds vote of the California Legislature to raise statewide taxes and a two-thirds vote of the local electorate to “impose special taxes.” Golden State voters were clear — no new taxes.
Nonetheless, activist judges have hacked at these voter-approved taxpayer protections ever since.
Among the key outcomes of that 2017 case was a loophole allowing special-purpose tax increases to pass with only a simple majority instead of the two-thirds vote mandated by Proposition 13.
The court suggested that if the tax increase was put on the ballot by a citizens’ initiative — rather than a government body — pesky constitutional requirements might not apply.
A number of cities immediately tested these loopholes. For example, San Francisco city officials, acting as “citizens,” wrote a June 2018 initiative to tax commercial property leases to fund childcare and early education. It passed with 50.8% of the vote.
State appellate courts have nodded and smiled.
Following San Francisco’s lead, proponents of Measure ULA wrote their citizens’ initiative to impose a new tax on real estate transfers for the “special purpose” of essentially funding themselves.
It says so right in the voter information guide: “ULA was drafted by homeless service providers, affordable housing nonprofits, labor unions and renters’ rights groups.”
Unsurprisingly, the initiative directs all that tax revenue to fund contracts that specifically benefit those very same groups and their highly paid executives.
Despite such brazenness, California voters don’t always go along with special interest overreaching.
“Citizens” favoring higher teacher salaries in the city of Manhattan Beach, for instance, placed an initiative on the June 2022 ballot that would have slapped a $1,095 tax on every property to fund “resources” needed for “attracting and retaining high-quality teachers.”
And also in June 2022, a “citizens’ initiative” in Kings County sought to raise the sales tax by 0.5% “exclusively to support the personnel” and other needs of the Kings County Fire Department. Both measures failed.
Los Angeles’ Mansion Tax, however, managed to pass – and voters were promised it would finally really “reduce homelessness.”
No matter that two previous tax increases had delivered little more than high-salaried jobs at nonprofits and new homeless housing averaging $600,000 per unit.
Measure ULA is a uniquely Californian mad-scientist experiment with direct democracy and a liberal activist judiciary.
But the scheme could easily spread to any city in which taxpayer-funded nonprofits and special interests try to “solve” big-city problems.
Here in New York this is already happening – only for renters rather than buyers – as advocate groups conspire with lefty politicians to push through yet another round of rental controls via the new “Good Cause Eviction” act.
Like Los Angeles’ Measure ULA, further rent restrictions won’t do much to provide homes for those who need it most.
But both efforts will further entrench their fates in the hands of self-serving special interest groups.
Susan Shelley is a columnist for the Southern California News Group and VP of Communications for the Howard Jarvis Taxpayers Association.
