The city of Los Angeles implemented a "mansion tax" in April of last year, imposing an additional levy on homes valued at $5 million or more. The goal was to use the generated revenue to fund efforts to combat the city's homelessness crisis.
However, the mansion tax measure is now facing a repeal, as the projected revenue it was anticipated to generate has failed to meet its benchmarks. This shortfall can be attributed to the combination of high mortgage rates and the resulting hesitation from both homebuyers and sellers to participate in the market.
Yahoo Finance's Rebecca Chen breaks down the details, providing insights into Chicago's failed mansion tax measure.
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This post was written by Angel Smith
Video Transcript
BRAD SMITH: Every now and then, we all get curious about the lifestyles of the rich and famous. But if your dream house and your dream is to have your Hollywood Hills home featured on MTV Cribs these days, you may be shelling out a little bit extra. Thanks to the Cities United to house LA measure. That's otherwise known as the city's mansion tax.
But now, one year in, the measure is up for appeal. Here to explain what exactly is happening is our very own Rebecca Chen. I mean, we've all seen some of these cribs on TV. And now, they could be impacted by this appeal as well here. What's going on?
REBECCA CHEN: The city of LA, they passed its version of Mansion tax about last April. So what essentially happened is they are charging about 4% to 5.5% on any home selling over $5 million in Los Angeles. Originally, this was estimated to bring in about 700 revenue annually.
And it's supposed to help the homeless crisis that we've seen in this city. But after a year, what we are really seeing is that this measure brought in barely a quarter of the revenue that it projected. And homeless crisis got worse in the city.
Experts I spoke with said this is happening because we are in such a housing crunch right now, that these home sellers who needs to pay these additional mansion taxes, they just figure you know what? I'm just not going to sell my house. So the number of home transactions for homes over $5 million in Los Angeles really dropped over the year. And city just has not been able to collect as much money as they originally expected.
BRAD SMITH: Rebecca, do experts think that things will change if interest rates go down?
REBECCA CHEN: That's a great question. So we all know that we are having this inventory crunch not only because of the underbuilding we've seen over the past decade, but also because interest rate is elevated. A lot of home buyers are really in this mortgage lock situation where they don't want to list their homes. For these sellers, over $5 million.
On top of the high mortgage rates, now they are hit with an additional taxes. So I think either one whether if the tax gets repealed or if interest rate comes down, either one of these happening could have an effect that eases up the inventory in the city of LA. So experts do think that with inventory dropping, it could help with the situation.
BRAD SMITH: And Berkeley, on the other hand, in California has shown more success. So can you explain why there bill from 2018 has yielded better results here?
REBECCA CHEN: Yeah, so you know, what didn't work in LA at least for the past year has worked in Berkeley with their mansion tax. They have seen a help-- a change in the number of homelessness. And that change is in a positive way.
In 2022, for the first time, they actually had less of a homeless crisis than before. And they've attributed a lot of that to the mansion tax that they've funded over in 2018. So another expert I've spoken with said maybe perhaps, it's just too soon for LA to see this mansion tax work. We probably have to wait a little bit longer to see how it will impact the community before we decide that this is not a good idea for the city.
BRAD SMITH: Well, yeah, and it comes back to what the dispersal of those funds once collected in taxes actually looks like and how actively that is managed as well. Finally, here, Rebecca, while we've got you on this Chicago voters, they recently rejected a proposed 2% real estate transfer tax on properties over $1 million and 3% on properties over $1.5 million. What were the reasons for the initiative failing?
REBECCA CHEN: This just happened last month. So it's a very new initiative. And what we can see, reports are coming out saying that a lot of the voters about 53% of residents in Chicago voted no. And a lot of the voters are saying that they think a mansion tax like this will hurt commercial real estate.
And it will also hurt the overall business economy. And what they are worried about is that it hurts the economy, the city they have to collect their revenue somehow. So they're going to pass down that revenue burden on to residential home owners and make them pay a higher property tax in the long run if the mansion tax doesn't work out. And that's why they voted no on this initiative last March.
And I think, overall, we are seeing this sort of mixed results of mentioned taxes throughout the nation. So what we know that Boston and a couple of other cities in Massachusetts are also looking into a similar measure. They're looking to vote on a similar measure. So it's going to be interesting to see how more view this going forward.
