Los Angeles revenue hit as 4% transfer tax on property over $5M curbs sales 70%

Los Angeles by creating a “mansion tax has created a massive loss of tax revenue.

“Smith found affected sales dropped by over 70% since April of 2023, when the measure took effect, with a worse decline for multifamily, commercial, and industrial space, while sales increased in the rest of the county and continued as normal for properties under the threshold. 

Smith says the impact of reduced sales means less tax revenue now and in the long term, which could require the city and county to scale back essential services, as growing deficits leave the state without the ability to provide any bailouts.” 

Oakland has a similar tax, look at what it has done to that dying city: “Property taxes fund most of the local government services people use, meaning lower property tax revenue can leave municipalities scrambling for funding.

In Oakland, for example, half of the city’s $80 million shortfall is due to lower than expected revenue from the city’s real estate transfer tax. “

Los Angeles revenue hit as 4% transfer tax on property over $5M curbs sales 70%

By Kenneth Schrupp | The Center Square, 11/28/24  https://www.thecentersquare.com/california/article_3ea1ac54-ad03-11ef-a667-27f1880a7ffa.html

(The Center Square) – The City of Los Angeles’s “mansion tax” on all property over $5.15 million has led to an over 70% decrease in affected sales, resulting in significant foregone property tax revenue, according to a research preview of county assessor data from Commonwealth Title. 

Mott Smith, a real estate development professor at the Sol Price School of Public Policy at the University of Southern California, analyzed the effect of Measure ULA, a voter-approved tax that was marketed as a “mansion” tax to fund social services, but applies to all real estate —  including offices, industrial space, shopping centers, and multifamily buildings. 

Smith found affected sales dropped by over 70% since April of 2023, when the measure took effect, with a worse decline for multifamily, commercial, and industrial space, while sales increased in the rest of the county and continued as normal for properties under the threshold. 

Smith says the impact of reduced sales means less tax revenue now and in the long term, which could require the city and county to scale back essential services, as growing deficits leave the state without the ability to provide any bailouts. 

“Everything from schools to police and fire to other social services are funded primarily through property tax receipts,” said Smith in an interview with The Center Square. “What Measure ULA appears to be doing is reducing property tax growth in Los Angeles County because of a bad policy in Los Angeles City at a time of probably the greatest fiscal strain we’ve seen in maybe eight to ten years.” 

Los Angeles City Controller Kenneth Mejia recently announced the city is “broke” and borrowing $80 million to cover court-ordered liability payments, suggesting the city can’t afford to lose money now. 

In California, property taxes are assessed at the value of the purchase price, with increases on assessed value capped at 2% per year, meaning a building purchased for $50,000 in 1980 is still taxed at $137,000, even though it may be worth over $1 million today. 

Because property sales reset the assessed value of the property back to the current market rate, resulting in higher property tax revenue, a slowdown in sales cuts into current revenue from the loss of non-ULA transfer taxes of 0.56% at the city and county levels, and future revenue increases from the resets. 

Property taxes fund most of the local government services people use, meaning lower property tax revenue can leave municipalities scrambling for funding.

In Oakland, for example, half of the city’s $80 million shortfall is due to lower than expected revenue from the city’s real estate transfer tax. 

Smith also warned that because most developers tend to build on property they buy for their project, a slowdown in buying means people don’t want to invest in Los Angeles. 

“This is a very concerning leading indicator that builders have left the LA market,” said Smith. “All the zoning in the world isn’t going to help if the builders have left.”

As an illustrative example, Smith noted if a development company bought a warehouse for $4 million, invested $500,000 in renovations, and sold it for $5.5 million, the developer would get a ULA tax bill of $220,000 — or half of the pretax profit. If investors covered 80% of the cost for 80% of the profit, the developer would be left with $56,000 in pretax profit, before paying employees. For many developers, this means investing in LA just isn’t worth it.