Los Angeles Tax Policies Are Increasing the Cost of Housing

A "For Lease" sign is posted in front of a house available for rent in Los Angeles on March 15, 2022. (Mario Tama/Getty Images)

Commentary

Every official in California claims to be working on solving the housing and homelessness crises. New Los Angeles Mayor Karen Bass campaigned to “bring leadership, accountability and action to dramatically reduce homelessness and end street encampments in Los Angeles.” Upon taking office, she “declared a State of Emergency on homelessness.”

But we keep finding instances of why housing costs so much in the first place: bad policies that discourage building new housing.

A new one: Last November city voters passed Measure ULA, which Ms. Bass opposed, to fund housing for the homeless. It came shortly after Measure HHH was passed in 2016, providing $1.2 billion in homeless housing bonds paid for by boosting property taxes.

Measure ULA imposed a new 4 percent tax on sales of commercial or residential real estate of more than $5 million, and 5.5 percent above $10 million. The existing tax for all real estate was 0.56 percent and continued for sales of less value.

Hence it’s called the Mansion Tax. Predictably it distorted the market. We now have the data.

First there was a boom in sales before the April 1 date of imposition. According to the Hollywood Reporter, “In the first quarter, the number of $5 million-plus homes sold increased by 35 percent, with Brentwood, Pacific Palisades and Hancock Park proving particularly active. Before the tax went into effect, Brad Pitt sold a compound for $33 million, while Mark Wahlberg sold a mega-mansion for $55 million. After April 1, taxes on those properties would have been about $1.8 million and $3 million, respectively.”

An 85-foot infinity swimming pool at a mansion in the Bel-Air area of Los Angeles. (Jae C. Hong/AP Photo)

Verdant Properties’ John Iglar explained to the paper how a similar tax in New York is charged not on the sellers, but on the buyers. That means L.A.’s tax punishes people whose wealth is in property, not stocks, bonds, or other investments. There are a lot of those people who got lucky with the vast increase in property values in recent years.

Mr. Iglar explained, “Someone selling a $5 million house may be an elderly lady who has $1 million in equity and a $4 million mortgage, and that $1 million is her life savings. It’s not fair. The buyer of a house is, by definition, wealthy at the time of purchase; the seller may be house rich and cash poor. So, it’s a distorted tax that’s going to hit a lot of normal people.”

A similar thing happened in the mid-1970s, when inflation pushed up taxes on people’s homes, especially on retirees with fixed incomes, leading many to be evicted because they couldn’t pay the taxes. That sparked 1978’s Proposition 13 tax revolt, which sharply cut property taxes and limited future increases.

Measure ULA—which ought to stand for Unhouse Los Angeles—is being challenged in court, with the money being held, not spent, until the situation is resolved.

Discouraging Housing Construction

But the measure obviously discourages building new homes for the wealthy. How does that affect everybody else? The wealthy will keep moving somewhere else to live the lifestyle of the rich and famous.

Or, instead of living in “mansions,” they will stay in modest homes. In turn, that means those homes will go up in price because higher demand raises prices. So such homes will not be available to the middle class—which then will have to stay in yet smaller homes, or rent instead of buy. In turn, the smaller homes or rental units will not be available to the poor, who will end up on the street.

Another problem is, looking forward, investors see Measure ULA as yet another assault on property rights. What next? Why build more if you have no idea what new tax or regulation will be imposed?

A sign is posted in front of new condominiums for sale in Los Angeles, Calif., on Dec. 19, 2022. (Mario Tama/Getty Images)

Young People Can’t Afford Housing

The accumulated assaults on housing have made it all but unaffordable to most. A new study of U.S. Census data by IPUMS, a data analysis company, found home ownership for those 25-34 years old was just 19.9 percent in the Los Angeles-Long Beach-Anaheim statistical area—the lowest in the country. The worst seven areas all are in California. No. 8 is New York-Newark-New Jersey.

The best affordability areas are in cheap areas in states like West Virginia and Louisiana. But Provo-Orem, Utah, a high-tech area, is 55.5 percent affordable for the young. In California’s rival, Florida, Palm Bay-Melbourne-Titus is 49 percent affordable; Sebastian-Vero Beach is 47 percent; and Pensacola-Ferry Pass Brent is 42.5 percent. No wonder California is losing population and Florida is gaining.

Basically, in these areas young people still can afford a home if they follow the old plan of paying down college and other debt, work hard, and save for a home. Not here. Although the California Dream has faded, there’s still a Florida Dream, albeit with hurricanes and a lot of bugs.

Conclusion: You Can’t Fool Markets

Add the new property sales tax to all the other taxes, plus rent control, and Los Angeles is in a tug-of-war with itself. So is California.

You can’t solve the housing crisis without at the same time strengthening property rights. The market always seeks out the most profitable places for investment. If there’s no profit, there’s no investment.

Such reforms as 1960s-style housing “projects,” government-owned developments like the infamous Cabrini-Green in Chicago, were tried and turned into instant, crime-ridden slums. So that’s out, too.

As I have reported many times in The Epoch Times, the state refuses to make common-sense reforms to Project Labor Agreements, which mandate high-priced union labor for subsidized housing construction—as well as to the California Environmental Quality Act. When Ms. Bass was Assembly speaker, in 2008-10, she didn’t advance any reforms, either.

A positive sign would be Measure ULA being thrown out in court. Or, if that doesn’t happen, Ms. Bass leading a repeal effort. Otherwise, she will have declared a homelessness state of emergency in vain.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.