By Laura Dougherty, Director of Legal Affairs
When Measure ULA was passed in the city of Los Angeles in November of 2022, it struck two blows against Proposition 13 (and 218). The first was against the two-thirds vote on local special taxes. The second was against the equity in property.
Effective April 1, 2023, Measure ULA imposed a transfer tax on the sale of property at 4% or 5.5%, depending on total sale price (or value of transfers) of $5 million or more. That’s as significant a cut of equity as it sounds.
While marketed as a “mansion tax,” the city has not just applied the tax to individual properties that are sold for $5 million or more. The tax also applies to sales of multiple properties, though they might sell for less than $5 million when sold individually, if the total amount of a single transaction is $5 million or more. Measure ULA applies to commercial property and apartment complexes, affecting prices and rents. As real estate values rise, it would gradually affect more properties.
Measure ULA was passed with only 57% voter approval, defeating the provisions of Propositions 13 and 218 that require two-thirds approval for special taxes like this one, where the revenue was earmarked for a specific purpose. This happened following court decisions that created a loophole for citizens’ initiatives in 2021. Measure ULA was a citizens’ initiative, and according to the 2021 judicial loophole, citizens’ initiative tax increases only require simple majority approval. This has been accepted as settled, for now. But Measure ULA’s strike against Proposition 13’s ban on transfer taxes is a bold new move.
Proposition 13 banned transfer taxes in 1978 to protect its most well-known feature: the cap on property taxes, a cap that keeps our housing costs stable. It was easily foreseeable that a local government might attempt to recoup perceived “losses” by imposing a balloon-payment tax when you sell or transfer and relocate. So, in the words that remain in our state constitution today, Proposition 13 expressly banned “a transaction tax or sales tax on the sale of real property within” a city, county, or special district. It seemed clear.
Courts later carved out an exception to Proposition 13’s transfer tax ban, but that exception does not apply to Measure ULA. In the early 1990s, courts decided that charter cities like Los Angeles may have transfer taxes, but only if the money goes to the general fund. This is because charter cities, unlike general law cities, have some home rule power under our state constitution, and the courts decided that transfer taxes for the general fund were a municipal affair. If you still live in a general law city, this is why you may see a measure on the ballot proposing to adopt both a charter and a general transfer tax at the same time. This type of tax — a general transfer tax — often motivates a proposal to become a charter city. In the last couple of years, there have been proposals to become a “limited charter city,” which are even more directly motivated by the tax opportunity.
Even so, the courts of the early 1990s were clear on this simple fact: Proposition 13 banned all special transfer taxes. That held. But today, Measure ULA is one such prohibited special tax. Rather than being deposited into the general fund, the tax revenue is earmarked for housing and homelessness services. While these are important issues, a special tax is nonetheless a great consumer of tax bandwidth, especially when burdening real property ownership. These are among the core reasons why special taxes need more careful consideration, and hence the two-thirds voter approval margin.
Until recently, no one would have dared to propose a special transfer tax like Measure ULA. So, what’s changed?
The same case that led to the reduction of the two-thirds vote margin to simple majority for special taxes has been used by Measure ULA proponents in a new way. That’s California Cannabis Coalition v. City of Upland (2017) 3 Cal.5th 924. The Measure ULA proponents’ reasoning was that if Propositions 13 and 218 do not apply to the procedures of citizens’ initiatives, then they also do not apply to the substance of citizens’ initiatives.
This is the boldest extension of Upland yet. The reduction of the voter approval margin on any local special tax from two-thirds to a simple majority when presented as a citizens’ initiative was one thing. Imposing an expressly banned type of tax is another.
Until Measure ULA, the cases following Upland were about the procedure of enacting a special tax, not its content. And the use of Upland to decide that the vote margin had been reduced was already a stretch because Upland was not about a vote margin. (Upland was about whether a general tax initiative should go on the ballot at a general or special election.) It was interpreted by lower courts to mean, however, that Propositions 13 and 218 do not apply to citizens’ initiative procedures generally.
The 2021 loophole reducing the voter approval margin from two-thirds to a simple majority on citizens’ initiative special taxes reasoned that, if Propositions 13 and 218 do not apply to citizens’ initiative procedures, then that also included the two-thirds vote margin because a vote margin is considered a procedure for enacting a tax. But none of the 2021 cases asserted that a special tax could be of a type that is otherwise prohibited. In fact, they repeatedly recognized a San Francisco charter provision defining the substance of initiative.
So, how does Upland affect the substance of a tax? It shouldn’t, but going forward, it could.
The substance of a tax is a different topic than the procedural rules for passing them. Upland itself said so. It specifically contrasted procedure and substance, reminding us that laws “of a nature” exceeding the lawmaking power may not be made. Even Justice Kruger’s concurrence said: “Charter cities may set their own initiative procedures.” She did not say that charter cities have automatic open access to any legislative substance.
Upland further reiterated that the purpose of the initiative power is to empower voters to adopt provisions “that their elected public officials had refused or declined to adopt.” But Measure ULA could never have been refused to be adopted by the Los Angeles City Council given Proposition 13’s outright ban on special transfer taxes. No one disputes as much. So, Measure ULA is also not aligned with the purpose of the initiative power. It is just invalid law.
The novel legal question is: Does the City of Los Angeles have the authority to impose a special transfer tax by initiative? The answer is No according to Los Angeles’s own city charter. The charter has a wise provision to protect against circumvention of law, including Proposition 13’s ban on special transfer taxes.
Since 1911, the Los Angeles Charter has set the substance of an initiative to what “the Council itself might adopt.” The Los Angeles voters made this change after their 1906 version had left initiative ordinances wide open on subject matter. They reaffirmed the language in 1925 and 1999.
Given this Los Angeles charter law, HJTA is arguing that Measure ULA is unconstitutional because the city can’t break its own charter law to impose a special transfer tax by initiative when its city council isn’t allowed to impose the same special transfer tax. The trial court disagreed.
The trial court perceived the power of initiative as something greater than the city’s charter, even in content. This is not so, as HJTA explained when it filed its opening brief on appeal to the Second District Court of Appeal in January. There is not one case on record that has allowed the content of an initiative to go outside the law on the basis of being presented by initiative. In fact, as many readers here know from the cancellation of the Taxpayer Protection Act by the California Supreme Court last year, the courts have held that the content of an initiative can indeed be critiqued and cause the initiative to be void.
HJTA hopes the Court of Appeal will see the difference between Measure ULA and the previous Upland cases. If not, it is possible that a new Upland loophole is here to stay, one that takes property owners’ equity and defeats Proposition 13’s well-known 1% cap.
Editor’s note: This is former Director of Legal Affairs Laura Dougherty’s final column for Taxing Times. We thank her for always fighting on behalf of taxpayers and keeping our Members well informed, and we wish her continued success in her new endeavors.