Los Angeles’ estate taxation has hampered affordable housing efforts

from Jim NewtonCalMatters

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It’s easy to understand the appeal of the so-called “mansion tax” in Los Angeles. Under the tax, owners of high-value homes give back to their community when they sell their homes and are liquid.

Many of these owners have reaped huge gains from Proposition 13, which caps property assessments on longtime owners. They also benefited from rising property values ​​and municipal investment in road and other infrastructure.

Through the estate tax — versions of which other jurisdictions, notably San Francisco, have adopted — high-end homeowners return the favor when the home is sold. Or so the argument goes.

The money generated by the tax then goes towards building affordable housing and rental and removal assistance for those at the very bottom of Los Angeles’ highly stratified landscape, where thousands of the very poor live at the foot of hills populated by the very rich.

Los Angeles voters approved the estate tax in 2022. It imposes a 4 percent tax on the sale of any property over $5 million and a 5.5 percent tax on any property sold for more than $10 million.

The tax is there raised more than $1.14 billion since it was accepted.

The problem with the tax is that it doesn’t work. It hasn’t spurred a wave of affordable housing in Los Angeles. It has not bridged the gap between rich and poor. He actually did a a bit of the opposite.

Collateral Damages

The tax has caught the attention of researchers who say its results are unequivocal: it is depressed multi-family unit construction — apartment buildings — in Los Angeles, the very market most likely to drive down rents.

As a recent study concluded, “Policies targeting luxury markets risk collateral damage for the very segments they aim to elevate.” The author of that study, UCLA’s Yingru Pan, added that the tax “may deepen the differences by discouraging moderate density solutions.’

Evidence of this isn’t just in the fact that new construction has been slow in recent months—permits for multifamily construction projects in Los Angeles fell from 1,540 in 2022 to under 1,000 in 2024. Those trends continue, and some of the blame falls on Washington, where President Donald Trump has ushered in dizzying levels of uncertainty as he juggles tariffs and economic policy, depending on the mood and who everyone’s mad at. day.

But the negative effects of the tax go beyond Trump and can best be understood by comparing construction in Los Angeles to that of neighboring cities, all of which live under the same Trump cloud. And there the results are hard to dispute. While all new construction has suffered in this economy, Los Angeles has lagged significantly behind neighbors like Santa Monica, Burbank and Culver City.

New building permits in Los Angeles fell 21 percent after the approval of the estate tax, Pan said, in stark contrast to steady permit trends in neighboring locations.

“Taxing high-value housing does not inherently redirect resources toward affordability,” the Pan report found. “Instead, it risks stifling supply broadly.”

Restoring its purpose

In response, a coalition of affordable housing advocates, developers and others called on the city to refocus the tax back on its original target: mansions.

Their group’s name, Fix It, Don’t End It, speaks to its mission, which is not to reject the tax, but rather to make changes to it.

Jesse Zwick, a member of that group, stressed in an interview this week that the unintended consequences of the tax are already visible for all to see, particularly its effects on new apartment construction.

“We’ve been talking about it as an estate tax,” he said, but its more serious impact is on other types of construction.

In fact, in the years since voters approved the Los Angeles estate tax, it has funded about 800 new housing units — hardly a remarkable success, given that more than 45,000 Angelenos continue to sleep without a roof over their heads.

Zwick and his colleagues recommended that the transfer tax be amended to exempt transactions for commercial and multi-unit projects for 15 years. During this time, no tax will be charged if the property changes hands; after that the tax will be in effect.

Other reforms may supplement this amendment, but it will at least give developers more margin for investment and more appeal to the bankers financing these projects.

It would also bring Los Angeles more in line with neighboring cities, leveling the playing field that the city’s estate tax has distorted.

The political clock

Sarah Dussault, who has helped guide city and county housing policies for decades, agrees that the tax, as written, reflects good intentions but falls far short of its goals of spurring new housing and job creation.

“We really have to do something,” she said.

This must happen soon as the political clock is ticking on the issue.

Anti-tax advocates, including the Howard Jarvis Taxpayers Association and the California Business Roundtable, were spurred into action by Los Angeles and San Francisco’s efforts to extract revenue from real estate deals. They are formidable foes and are move to place a measure on the November ballot, which would remove the power of local governments to impose these levies.

Hoping to prevent that, Councilwoman Nitya Raman introduced a measure in January to allow city voters to take up amendments this June, but her proposal came without much warning and landed with a thud among her colleagues. Instead, a council committee is reviewing those proposals and could put a package on the November ballot. Voters will have to approve any changes.

Meanwhile, the Jarvis-backed measure is moving forward. Should it pass — and Californians do have a history of using the ballot box to eliminating unpopular estate taxes — Los Angeles will lose its estate tax entirely by ending it instead of changing it.

It would be a shame.

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