In 2022, Los Angeles voters approved the Scale ULA, a transfer tax on the sale of high-value properties within city restrictions. The nickname, known by its supporters, has imposed a 4% tax on sales exceeding $5 million and a 5.5% tax on sales exceeding $10 million. That revenue is allocated to low-income housing programs.
ULA taxes are paid by the seller. This may explain why Mayor Karen Bass proposed to stop it after the wildfire. The mayor is right to be worried. Pacific Palisades’ property values often exceed $5 million, creating concerns that taxes could lose everything and be punished by owners who want to sell and move on. However, the measurement ULA problem is carried out more deeply. Whether or not it is suspended, it needs to be reformed.
Despite its nickname, ULA is more than just a tax on mansions. It applies to almost any property priced over $5 million, including apartment buildings, offices, soundstages, hotels, shopping centres and more.
Furthermore, ULA is not a tax on profits. Based on sales price. Therefore, despite the owner’s overall loss, the owner of an office building that has plummeted 90% value as the Covid-19 pandemic sold it for $15 million and could ow a ULA tax of $825,000. Meanwhile, the person who bought a house for $500,000 a decade ago and sold it for $1.5 million today paid nothing. The ULA design means that big losses can be taxed significantly, but big profits will be free to Scotts.
Measure ULA also has a steep “cliff.” This is a threshold where small prices will cause a significant tax hike. Real estate for sale for $5 million does not have ULA tax, but those sold for $1 pay $200,000. Such cliffs create strong incentives for owners to avoid taxes.
The easiest way to avoid taxes is to not sell, and our research shows that in the first two years since the ULA was implemented, high-value real estate sales in the city fell by about 50%. Higher interest rates and construction costs are not due to the decline. These conditions affected the entire region. And there was a temporary “rush to rush” before ULA was implemented, but our analysis explains how it works. The 50% drop is especially affected by ULA.
Decreased sales mean less revenue generated by ULA. Supporters estimated that ULA would raise between $600 million and $1.1 billion a year. So far, the collection averaged $288 million a year, less than half the lowest forecast.
Furthermore, by reducing massive sales, ULA slowed production of market-rate apartments. Most apartment building developments involve purchasing the right site and selling the finished building. ULA can add a significant amount of costs for both of these transactions. Also, most market-rate housing developments include affordable apartments with revenue limits offered by developers in exchange for an increase in project size, so Los Angeles is also increasing the fewer of them. Conservatively, ULA estimates that it spends more than 1,900 new units per year in cities, of which at least 160 would have produced affordable units without public funding. Meanwhile, since taxes were enacted, ULA revenue collected from new apartment complex projects is sufficient to subsidize at most half of the time. ULA’s poor designs make urban affordable housing unnecessary cost.
The impact will not stop at home. ULA is also delaying large transactions for commercial, industrial and office real estate. This effect, coupled with a slower home transactions, has hindered property tax growth. California’s property tax system increases local revenues, primarily when real estate is revalued at the time of sale. Large transactions contribute disproportionately to their growth. Revenue exceeding $5 million accounts for just 4% of all transactions, but accounts for more than 40% of the city’s tax-based growth. Over time, fewer large transactions means less funding for LA’s tax base, schools, community colleges, counties, and all public agencies and programs that rely on its safety net program.
The voting language of Measurement ULA included strong restrictions on the authority of the City Council to amend that, but ULA is amended. The most effective approach is state behavior. State governments almost always have the power to revoke or modify local actions, and taxes are undoubtedly a matter of interest for the state. Because they have a direct impact on California’s housing goals and overall financial health.
Targeted state laws could mitigate the negative impact of ULA while maintaining the goal of raising funds to support low-income renters. Options include limiting taxes to single-family homes (faxing true mansions), adopting marginal tax rates to eliminate “cliffs” (to work in a similar way to income tax), or limiting ULAs to properties that have not been sold or improved for many years. Sales of these properties are much more likely to represent a major windfall for sellers, and such sales do not tend to undermine housing or job creation.
Los Angeles needs working housing and economic policies, particularly when it recovers from the wildfires of January. This means balancing the urgent need for new revenue with policies that promote new housing and jobs. As is currently structured, measuring ULA makes it difficult to achieve that balance. It could be a better tool – meeting voters’ desires for more affordable housing, strengthening the local economy, and protecting the local social and financial foundations.
Michael Manville is a professor of urban planning at UCLA and a affiliated scholar at the Lewis Center for Regional Policy Research. Shane Phillips is the Lewis Center Housing Initiative Project Manager. Jason Ward is the co-director of the Land Centre on Housing and Homelessness.
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