“MANSION” TAXES: DISGUISED HOME EQUITY THEFT AND WHAT HOPE EXISTS TO FIX IT
The path to high taxes is paved with good intentions. When it comes to weighing the pros and cons of a tax, one might think: “I’m worried about people in need or about my local government continuing to function.” And “This ballot measure looks like it will help people in need or help my local government continue to function.” And finally, “Wow, it’s a really high tax, but wealthier people than me will pay it, not me, so I’ll vote yes.”
This line of thinking is exactly what some politicians and special interest groups bank on. We’ve seen a lot of it lately with the rise in vacancy taxes and fees, which have easy targets. But these voters are being scammed. The government will come for them too, possibly in the form of transfer taxes paid on the sale of real property.
Everyone benefits from Proposition 13, property owners and renters alike. If you own
and sell your home, your equity should not be confiscated because you needed to move. If you rent your home or business space, your rent payments should not be increased because of forced sales or more taxes on the property owner.
Proposition 13 specifically banned transfer taxes for this reason. Paying a huge tax upon selling your home was a known threat to Proposition 13’s stabilization of property taxes. It’s the government saying, “Now that you’re no longer living there, give us all the money we couldn’t take from you while you did.”
The ban on transfer taxes in Proposition 13 was outright. But governments found ways to convince the courts otherwise. In the early 1990s, exceptions to Proposition 13’s ban on transfer taxes became reality, but with a firm limit. Back then, charter cities argued to the courts that they should be allowed to have transfer taxes because of their charters. They reasoned that since they follow a home rule form of government, their transfer taxes would be a local affair. Since Proposition 13 is a matter of statewide concern, it shouldn’t apply to them in this respect. The courts essentially said “fine, but only for your general funds.” The Constitution remained clear to the courts that no special taxes can be imposed as transfer taxes.
Last fall in Los Angeles and Santa Monica, the “mansion taxes” were proposed. They are special taxes. They are transfer taxes. They are blatantly unconstitutional.
Los Angeles Measure ULA received 57% voter approval. Beginning April 1, 2023, it imposes a tax of 4% on the sale or transfer of real property worth over $5 million and 5.5% on real property worth over $10 million. It exempts transfers to non-profits, community land trusts, and limited equity housing cooperatives. The tax funds are specially earmarked for housing and homeless services.
Santa Monica Measure GS received 53% voter approval. Beginning March 1, 2023, it imposes a tax of 5.6% on the sale or transfer of real property worth over $8 million. The tax funds are specially earmarked for homeless services and schools.
Measures ULA and GS proposed special transfer taxes, something all courts have agreed are banned by Proposition 13 where it says “Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.”
So how did this happen? And can it be undone before local governments feel free to charge higher percentages and/or charge on lower sales price thresholds?
It started with the same root as the erosion of the two-thirds vote on your local special taxes, the 2017 Supreme Court case of California Cannabis Coalition v. City of Upland (Upland). This case only decided that a general tax proposed by initiative needed to be placed on the ballot sooner than it otherwise would have been. This was because it was proposed as an initiative and the State Legislature had a statute for that. Ironically, the Legislature has since repealed that statute, but the interpretation of the Supreme Court’s decision lives on to torture taxpayers.
While the Supreme Court refuses to review the subsequent cases suffering from these issues, the Upland case has been interpreted to mean that taxes proposed by initiative do not need to follow rules, such as Propositions 13 and 218. The first victim was the two-thirds vote for local special taxes. Several cases have concluded that the two-thirds threshold is not applicable where a special tax is proposed by initiative. Naturally, local politicians can then act as citizens by copying and pasting their tax proposals onto initiative petitions and pass them on simple majority. And they have.
When we learned about Measures ULA and GS, we saw that this logic was being extended. Because the measures were proposed as initiatives, we realized that their advocates must believe that Proposition 13’s ban on special transfer taxes doesn’t apply to them any more than the two-thirds vote does.
In this instance, we’re not dealing with a voter approval threshold. Rather, we’re dealing with the very substance of the legislation itself, not how it is passed. For example, no one could pass a law that declares a city’s official religion, not even a charter city.
If the substance of Measures ULA and GS stands, however, the doors will be wide open to taxing the sales of everything from shacks to mansions and at any tax rate, stealing any amount of home equity when it’s time to move. That is what the well-intentioned voter in the first paragraph isn’t seeing. And that’s why HJTA, along with the Apartment Association of Greater Los Angeles, filed suit to invalidate Measure ULA. (Another group, the California Business Roundtable, is challenging Measure GS.)
As of the writing of this article, HJTA attorneys do not know if there will be the opportunity to stop the tax before it goes into effect April 1. Generally, taxes cannot be stopped unless litigation is successful at the end of the appellate process. But we will continue to litigate the tax
to the end. Claims for refund should be filed if taxes are paid during the litigation. We will post a claim form https://www.hjta.org/resources/taxpayer-tools.
What’s helpful in Los Angeles is that the Charter declares the power of initiative to be coextensive with the power of the City Council. Thus, even in the convoluted wake of Upland, we have a strong case that if the City Council cannot impose a special transfer tax under Proposition 13, neither can an initiative.
There is also another way that Measures ULA and GS may be defeated. On January 25, 2023, the Taxpayer Protection and Government Accountability Act qualified! It will appear on the November 5, 2024, ballot. It has a retroactivity provision going back to January 1, 2022. So, if it passes, it will apply to Measures ULA and GS, and many others.
Among its protections for taxpayers, the Taxpayer Protection and Government Accountability Act would restore the two-thirds voter approval requirement for all special taxes. Since Measures ULA and GS did not receive two-thirds voter approval, and it is undisputed that they are special taxes, they would have to go back on the ballot and receive two-thirds approval or expire. This is assuming litigation has not already found them invalid.
We hope for positive outcomes for taxpayers in these cases. And, as always, we thank you for your support while we fight against this wave of new threats to Proposition 13.