How an anti-tax backlash could drain California budgets

By Brian Hanlon, especially for CalMatters

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In recent years, and with the best of intentions, several California jurisdictions have adopted real estate transfer tax measures that they hoped would raise revenue and help finance affordable housing.

But Los Angeles’ Measure ULA, San Francisco’s Proposition I, and Santa Monica’s Measure GS turned that old adage on its head: the best intentions can accidentally lead to unpaved roads. The taxes crushed housing production and in some cases even resulted in lower incomes than the status quo.

More worryingly, these poorly designed transfer taxes have led to a growing anti-tax backlash led by Howard Jarvis Taxpayers Association — the same group that brought us the infamous Proposition 13 — which did qualified a measure for the November election. The “Local Taxpayer Protection Act” would not only eliminate problematic transfer taxes, but also dramatically raise the threshold for voters to approve new funding sources. This would seriously hamper the ability of local authorities to raise revenue for vital services such as housing, roads, schools and fire protection.

Unless the Legislature and governor act soon, the confusing ballot measure could strain the finances of every jurisdiction in the state.

First, the facts: The tax measures passed by Los Angeles, Santa Monica and San Francisco are reducing housing construction.

Along with bonds and sales taxes, some cities rely in part on real estate transfer taxes, fees charged to the seller when a property changes hands. Defined as a percentage of the sale, these taxes are usually calibrated to generate meaningful revenue without discouraging sales. Counties and other general law cities are prohibited from charging more than a 0.11% transfer tax.

But in ULA cases, Prop. I and Measure GS cities experimented with much higher transfer taxes, often touted as “estate taxes,” because they would, in theory, apply to very expensive homes. In practice, these levies fall primarily on large commercial and multifamily transactions, not on single-family homes.

The results speak for themselves.

in Los Angeles, the ULA measurement rate is set too highand has halted home sales as well as urgently needed new construction. The Los Angeles tax applies in full to all transactions over $5 million, creating a steep “scale” rather than a gradual, marginal rate. In other words, a luxury home that sells for $4.9 million pays $0 in ULA taxes, but an affordable 8-unit apartment building could pay over $200,000 in transfer taxes.

The result? A dramatic reduction in new apartments and an equally dramatic collapse in the turnover of the types of properties most likely to become new homes.

A a recent UCLA analysis suggests that the ULA may now cost the city and county more in lost property taxes than it collects from the transfer tax itself. Transfer taxes are one-time charges that apply only at the point of sale, unlike property taxes, which generate a stream of public revenue each year.

In effect, some cities are robbing counties, school districts, fire protection districts and other taxing authorities by withholding 100% of transfer taxes while denying all other property tax revenue.

Santa Monica’s Measure GS produced similar effects. Its rate of $56 per $1,000 on sales of $8 million or more is among the highest in the state. In the year since it went into effect, residential sales above that threshold were cut in half, and commercial sales fell from 18 to 5. The measure raised well under half of projected revenue.

Prop. San Francisco’s I, which levies up to a 6 percent tax on the largest transactions, has slowed home production and sales so significantly that city officials are now pushing to cut the tax in half. When the officials closest to a measure take it upon themselves to revise it, the lesson is worth taking seriously.

The measure, now on the November ballot, would partially address that problem by capping transfer taxes at 0.11 percent statewide. But it would create a more serious problem by raising the threshold for voter-approved taxes from a simple two-thirds majority — threatening local government finances in California and compromising funding for schools, roads, housing and public safety.

This outcome can be avoided, but the window is short. The governor and Legislature have until June 25 to reach a deal that would prompt supporters to withdraw the measure from the ballot.

The specifics remain to be worked out, but a workable framework is at hand – and all stakeholders are at the table. It would correct the well-intentioned but poorly executed taxes passed in a handful of cities. More importantly, it would help prevent the disappearance of housing production, a goal that state leaders agree should be our guiding star.

The Legislature and the governor must reach this agreement and remember that while good intentions are good, roads are still paved with tax dollars.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.