L.A.’s new “mansion tax” will spike new apartment construction and raise housing costs

Last November, Los Angeles voters approved Measure ULA, which is forecasted to generate $600 million to $1.1 billion annually to fund housing for lower-income households and stronger tenant protections. The source of funds is a tax on property sales: 4% on properties worth between $5 and $10 million, and 5.5% on properties worth above $10 million. Supporters have thus labeled Measure ULA the “mansion tax”, suggesting that it will fall primarily on the wealthiest homeowners.

Proponents estimate that Measure ULA will create 26,000 homes over the coming decade, including permanent supportive housing for people exiting homelessness, while also providing renters with representation in eviction court and monetary assistance to tenants at risk of becoming homeless.

Homelessness is primarily caused by high housing costs, itself a product of a longstanding lack of housing production. Solving L.A.’s grievous homelessness crisis requires audacious, well-crafted solutions that rapidly expand the availability of supportive housing, while also accelerating broader housing supply growth. This formula is succeeding in cities as disparate as Houston and Helsinki.

Unfortunately, Measure ULA, while audacious, is far from well-crafted. The property sales tax will discourage new private-sector housing construction, and the funds will be disproportionately steered to favored interest groups who have struggled to build supportive housing quickly and cost-effectively  — exacerbating the very problems that the measure was intended to address.

Let’s start with the so-called “mansion tax”. Measure ULA taxes all properties worth above $5 million, not just lavish houses. According to a recent UCLA Lewis Center report, most of Measure ULA’s sales tax revenue will come from the sale of commercial buildings, industrial properties, and apartment buildings, including modest ones. Just 38% of funds would come from single-family home sales.

Egregiously, the tax even falls on the sale of newly-built apartment buildings. While a 4% to 5.5% tax may sound insignificant, it’s often equivalent to most of the profits that developers would earn from building a typical apartment complex, destroying their incentive to undertake the project. While developers could respond by offering less money for a property they wish to redevelop, property owners might decline to sell, or would sell to a buyer who can offer a higher bid but doesn’t intend to redevelop the property.

UCLA housing researchers Shane Phillips and Maya Ofek forecasted that 4% of the city’s annual housing production could be deterred by Measure ULA’s tax — equivalent to 650 homes per year, based on L.A.’s 2021 homebuilding pace. Phillips now believes that the true number is higher, since the tax may discourage banks from financing apartment projects. In any event, Measure ULA will result in fewer apartments built, ramping up demand for the existing housing stock and raising housing costs.

To make matters worse, housing projects that receive Measure ULA funding will likely suffer the same sky-high costs and endless delays that have bedeviled similar projects financed through Measure HHH, a $1.2 billion bond passed in 2016 to fund permanent supportive housing. Measure HHH-funded projects with 65 or more units must adhere to a project labor agreement (PLA), which mandates a near-100% union workforce. Economist Jason Ward at the RAND Corporation found that the PLA requirement increased construction costs of affected projects by 15%, possibly because fewer contractors bid on these projects. Ward also found that many developers avoided PLAs by building smaller projects with fewer units.

Additionally, Measure HHH projects have been subjected to a cumbersome permitting process and lawsuits from housing opponents, frequently on specious environmental grounds. This created further slowdowns and cost escalation: while Measure HHH was intended to fund 10,000 homes, only 2,100 have been completed, six years later, at an average cost of nearly $600,000.

Measure ULA’s authors seem to have learned little from Measure HHH’s troubles. Not only does Measure ULA mandate PLAs — they apply to projects as small as 40 units. Also, since the measure does not streamline project permitting, many Measure ULA-funded projects will be exposed to frivolous lawsuits from NIMBYs.It’s no surprise that the pro-Measure ULA campaign was heavily funded by labor unions, who clearly stand to benefit from what amounts to a full-employment act for their members. Sadly, this comes at the expense of homeless Angelenos, as well as people simply seeking housing that fits their budget.

The future of Measure ULA, slated to take effect on April 1, was recently thrown into flux by a lawsuit filed by anti-tax activists and apartment owners. They argue that Measure ULA’s tax violates the state constitution. But overturning the measure risks throwing the baby out with the bathwater.

A better solution would revise Measure ULA to deliver housing faster and more cost-effectively. That’s where Mayor Karen Bass and the City Council can act. They’re permitted to amend Measure ULA to “further or facilitate” its purposes, which includes “increasing the supply of affordable housing”.

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To achieve this outcome, new apartment buildings should be exempted from Measure ULA’s sales tax. Additionally, Measure ULA-funded construction should not be subject to project labor agreements. All workers on Measure ULA-funded projects, regardless of union membership, would still earn union-level pay and healthcare benefits through the measure’s “prevailing wage” requirement, preserving a strong incentive to hire union workers.

Finally, all new multifamily housing — whether built by nonprofits or the private sector — should be permitted through an expedited “by-right” process without City Council interference. While Mayor Bass recently ordered city departments to accelerate permitting for 100% deed-restricted housing, a similar sense of urgency must be applied to all housing.

Mayor Bass was elected on ambitious promises to solve homelessness and reduce housing costs, declaring that “you should not have to work three jobs just to afford to pay rent in Los Angeles.” By reforming Measure ULA, the mayor can show that her actions speak louder than words.

Anthony Dedousis is a board member of YIMBY Action, a national pro-housing advocacy organization, and CEO of Revival Homes, a lending platform and contractor marketplace for accessory dwelling units.

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