Taxation policies that sound good on social-justice grounds rarely work out well. Los Angeles’s mansion tax is the latest example.
Los Angeles passed a tax on mansion sales to fund government programs for the homeless. Sounds simple, right? Take from the rich, who can afford the tax, and give to the poor, who need the assistance.
Well, the implementation of the tax is going poorly, for reasons that should have been obvious.
The tax is on the sale of homes valued at $5 million or more, and it took effect on April 1 of this year. Let’s say you owned a house valued at over $5 million on January 1 in Los Angeles (congratulations!). There are a few obvious ways to avoid this tax.
The first is to sell the house before April 1. Sure enough, the Washington Post reports:
In the months before the tax took effect, high-end real estate sales exploded in L.A., as homeowners maneuvered to unload costly properties ahead of the new levy. The Los Angeles Times reported that celebrities including Brad Pitt and Mark Wahlberg were among those selling homes in the days leading up to April 1. A representative for Pitt declined to comment, while representatives for Wahlberg did not respond to a request for comment.
In the final days of March, some real estate agents even threw in free luxury cars to get clients to close sales before April 1.
The second is to sell the house for just a hair under $5 million. The Post reports:
[Real estate agent Danielle] Revelins has a home listed in the Venice Beach neighborhood of L.A. for $4,999,000 — a price tag she freely admits is aimed at avoiding the $5 million trigger for the new tax. The three-story, 3,961-square-foot property is an “entertainer’s dream,” according to the listing, with a “floating staircase” and hardwood floors.
“That property is worth a little bit more,” Revelins said. “But if we listed it at $5.2, they would have to pay $200,000″ in taxes, money that Revelins says the city would squander.
Property owners could also split their property into multiple lots or between two spouses as “tenants in common” to get valuations below $5 million each, the Post reports. The Los Angeles real-estate industry has been advising its wealthy clients on how to avoid the tax for months.
The tax is raising less money than expected. The Post reports that from January through the end of March, 248 properties priced above $5 million were sold in Los Angeles. Since the tax went into effect on April 1, only 34 have been sold. Supporters of the tax hoped it would raise $900 million per year. But the city now estimates it will raise $670 million, and Mayor Karen Bass is only counting on $150 million in her homelessness plan, the Post reports. In its first two months in effect, the tax had only raised $15.5 million.
Taxation policies that sound good on social-justice grounds rarely work out well. For raising revenue, the best taxes are designed with broad bases and low rates. This tax has one of the narrowest bases possible (property sales over $5 million) and a relatively high rate for the type of activity it is taxing (4–5.5 percent on real-estate transactions). Naturally, people with the means to do so — and people with property worth over $5 million in Los Angeles have the means to do so — avoid the tax, and the government doesn’t get the revenue it wanted.