A Los Angeles tax law passed in 2022 intending to raise money for affordable housing may end up costing the county in the long run by flatlining commercial and luxury home sales and subsequent property-tax collections on post-sale values. Dubbed the “Mansion Tax,” Measure ULA imposes a 4 percent tax on real estate sales above $5 million and a 5.5 percent tax on sales above $10 million. A new SSRN working paper by a team of economists from UC Irvine, UC San Diego and Harvard breaks down the way this measure interacts with Proposition 13 to detract high-value real estate sales with consequences for future property tax revenue.

“While Measure ULA raises money up-front every time a big property sells, it also makes selling more expensive, so many owners simply postpone or cancel transactions,” says Jack Liebersohn, UC Irvine economics assistant professor and study coauthor. “But regular property-tax revenue depends heavily on sales because Prop 13 freezes each property’s taxable value at the price it last sold for with an at most 2 percent rise per year, no matter how quickly market prices climb. So, discouraging property owners from selling also slows reassessments and, in turn, shrinks future property-tax collections.”

High-value real estate activity in Los Angeles County appears to back this assessment. Using real transaction data alongside economic modeling of fiscal effects, researchers show that losses in future property tax revenue cancelled out at least two-thirds of the revenue gained from Measure ULA. The net revenue loss projection was larger for high-value and commercial properties, says Liebersohn.

“The city expected Measure ULA to yield roughly $600 million annually for subsidized housing and tenant assistance. Actual receipts have been about half as large, as they depend on high-value turnover,” says Liebersohn. “Because full property reassessment only happens after transactions, the Mansion Tax increases the average gap between properties’ assessed and market values, resulting in an overall lower property tax base.”

Findings have implications beyond the Golden State, says Liebersohn: “Tax assessments lag market prices throughout the United States and the world. In over half of U.S. states, as in California, growth in tax assessments between transactions lags market values, so any reduction in transaction frequency reduces the growth of property tax revenue. Many cities are considering transaction taxes as a way to boost revenue, but our findings show they may not raise as much money as proponents think, once you account for their effect on property taxes.”

Coauthors on this work include Tejaswi Velayudhan, UC Irvine; Vikram Jambulapati, UC San Diego; and Daniel Green, Harvard Business School.

-photo via dszc/iStock