Study finds LA would have more affordable housing if ‘mansion tax’ did not apply to new apartments

A new study links the city of Los Angeles’ “mansion tax” with declining development of new apartments — some of which would have been the kind of low-income housing the tax was designed to boost, according to researchers.

The report, published Friday by the nonprofit research organization RAND and UCLA’s Lewis Center for Regional Policy Studies, compares depressed housing development inside the city with more robust activity in other parts of L.A. County not subject to the tax.

The researchers estimate the tax — approved by voters in November 2022 through Measure ULA — has reduced new housing production by about 1,910 units per year, or a roughly 18% drop compared with pre-election levels.

If the tax had exempted apartment buildings constructed within the last 15 years, the researchers write, L.A. likely would have ended up with more affordable housing on balance.

“We found that it is having a pretty strong negative effect on both market rate housing and affordable housing,” said Shane Phillips, a UCLA housing policy researcher who co-authored the study.

Measure ULA supporters defended the tax, saying it has supported crucial renter assistance programs and the development of 795 new apartments restricted to low-income tenants.

Joe Donlin, director of the United to House L.A. coalition, said carve-outs for newly built apartments would come at the expense of vulnerable Angelenos the voters wanted to help. He said the report’s recommendations “call for taking tens of millions of dollars away from preventing families from falling into homelessness.”

How LA’s ‘mansion tax’ works

Measure ULA took effect in April 2023. It applied a new 4% tax to properties selling for more than $5 million and a 5.5% tax to properties selling for more than $10 million.

Revenue must be spent in specific ways outlined by the measure, such as subsidizing new affordable housing development and funding rent relief programs for struggling tenants. It will also pay for the “Right To Counsel” program recently passed by L.A.’s City Council, which aims to provide free eviction defense lawyers to low-income tenants.

Measure ULA was pitched to voters as a “mansion tax” that would put wealthy homeowners on the hook for efforts to confront the city’s housing crisis. But so far, high-end single family home sales have comprised less than half of the revenue, with more coming from the sale of other properties like commercial buildings and apartment complexes.

The tax has also fallen short of original projections. Voters were told it could raise more than $1 billion per year. During its first two years, it has raised about $630 million.

Has the tax scared away developers?

The city of L.A. faces a severe shortage of affordable housing, and is required to plan for nearly a half million new homes by 2029 under state law. In recent years, the city has been falling far short of reaching that goal.

Since its passage, Measure ULA has raised concern among some housing advocates about the tax’s potential to dampen investment in new housing. By increasing the cost of selling a recently built apartment complex, skeptics of the tax argue, the measure could be scaring off developers who already face higher construction costs and regulatory hurdles in L.A.

The UCLA and RAND researchers say their study essentially confirms those fears.

They say the city’s 40% fall-off in new housing permits cannot be entirely blamed on larger economic trends like higher interest rates or inflation. Other cities in L.A. County are facing the same headwinds, but have seen less steep declines in housing development.

“The difference between those two declines is essentially what we can attribute to Measure ULA, and it's a very significant number,” Phillips said.

Some apartments would have gone to low-income renters

The portion of Measure ULA revenue collected from the sale of recently built apartments totaled about $29 million by the end of 2024, the study found. The researchers estimate that revenue would be able to subsidize about 70 new units of affordable housing each year.

But by discouraging more widespread housing development, the study found, the city is losing not just higher cost market rate units — but some of the low-cost apartments bundled in those new market rate buildings.

Most large projects in L.A. now use state laws to boost their density in exchange for keeping a small percentage of units affordable to low-income renters. Because Measure ULA is causing an overall decline in those projects, according to the study, the city of L.A. is losing about 168 low-income apartments per year.

“If it did not tax newer multi-family buildings shortly after construction, it would actually help us produce even more affordable housing,” Phillips said.

Study recommends exemption for new buildings

It remains to be seen if L.A. City Council members will take up the report’s recommendation of exempting apartment buildings constructed within the last 15 years. The measure already includes some carve-outs, such as exemptions for housing built by nonprofit developers.

Despite finding some negative consequences from the tax’s implementation, Phillips supported and voted for Measure ULA. He said tweaking the policy to exempt newer apartments would be a minor change, causing overall revenues to decline by about 8%, but a major improvement.

“I just don't see much purpose in holding on to this so tightly when it has such negative consequences and it represents such a small amount of revenue,” he said.

The vast majority of tax revenue, about 78%, comes from the sale of buildings constructed more than 15 years ago, according to the study.

Phillips said California lawmakers could also intervene by placing state-wide limits on transfer taxes like Measure ULA. Similar taxes have also been adopted in San Francisco and Santa Monica.

Supporters of Measure ULA believe the policy may still be going through a transition period. They say developers could have been staying on the sidelines, waiting to commit to new projects until various legal challenges were resolved.

Higher levels of recent housing development in other parts of L.A. County could be the result of factors that have nothing to do with the tax, supporters argue, such as various cities passing local housing plan updates that offer new development opportunities. They say regional differences in housing production could even out over time, showing limited impact from Measure ULA.

Donlin with United to House L.A. said that, for now, those benefiting from Measure ULA include “people who are experiencing homelessness, low income renters and people in search of good jobs, and anyone who cares about addressing our housing crisis in L.A.”