Los Angeles Mansion Tax Linked to Decline in Housing Construction and Tax Revenue
The so-called ‘mansion tax’ implemented by the City of Los Angeles two years ago has negatively impacted housing construction and tax revenue, according to a study by the University of California at Los Angles reported on by Bloomberg.
Measure ULA imposes a 4% tax on Los Angeles properties that sell for $5 million or more and 5.5% on those priced at $10 million and up, with revenues earmarked for affordable housing production and homelessness prevention. In addition to residential properties, the tax applies to the sale of apartment buildings.
According to UCLA’s study, the voter-approved levy has caused a 50% drop in sales above the $5 million threshold, which has undermined residential construction, limited new commercial and manufacturing opportunities and weakened the city’s property tax revenue growth. By contrast, the study said sales of high-end properties in other areas of Los Angeles County have increased over the same period.
Permits for multifamily projects in the city dropped both in 2023 and 2024 after the measure took effect. The number of applications for permits for buildings with at least five units fell from 11,786 in 2022 to 4,774 in 2024, according to the California Homebuilding Foundation.
“The high-value transactions that ULA targets are only a small share of total sales in the city,” UCLA professor Michael Manville and Mott Smith, an adjunct professor of public policy at the University of Southern California, wrote in the report. “But they account for a disproportionate share of growth in the city’s property tax base, and a disproportionate share of the sales that lead to new housing starts and new local jobs.”
The program has generated about $480 million as of December 2024, well short of the $600 million to $1.1 billion the city expected to collect.
Some developers are finding a way around the mansion tax by taking up projects just outside the city limits. For example, Houston-based developer Hines bought the 140-unit Pasadena Gateway Villas in nearby Pasadena for $60 million. The opportunity received significant interest from buyers in large part because it was not impacted by the tax.
Meanwhile, the cost to build multifamily housing is much higher in California than in other markets. For example, it is 2.3 times more expensive to build multifamily housing in California than in Texas and 1.5 times more expensive than in Colorado. State and local policies that contribute to long permitting and construction timelines and higher local development fees are a major factor, according to a report by public policy research organization RAND Corp.
The time to complete a project in California is more than 22 months longer than the average time required in Texas, and municipal impact and development fees average $29,000 per unit in California compared with $1,000 per unit in Texas and $12,000 per unit in Colorado.
Source: GlobeSt/ALM