Episode 110: The Measure ULA Episode with Jason Ward and Mott Smith (Incentives Series pt. 10)

Shane Phillips 00:00:05
Hello, this is the UCLA Housing Voice podcast, and I'm your host, Shane Phillips. This is episode 10 in our ongoing Incentives Series, supported by UCLA's Center for Incentive Design. Throughout this series, we'll be exploring the misalignment between what we say we want our policies and processes to achieve, the behaviors and outcomes they actually incentivize, and potential solutions. Yes, we are back to the series and we will be wrapping up soon. For these last few episodes, we're going to be talking about taxes, a subject rife with good and bad incentives, and that certainly includes in-housing policy. The first episode is about real estate transfer taxes, which are taxes on the sale of property. Specifically, we're going to talk about Measure ULA, the transfer tax approved by Los Angeles voters in 2022 that went into effect in April 2023, and about which the Lewis Center has published not one, not two, but three reports over the past year. Mike Manville and I are joined by our co-authors on those reports, Jason Ward and Mott Smith. Measure ULA is a great case study on unintended consequences. And since the conversation itself is a long one, I'm gonna dispense with a long introduction. One thing I did want to note though, we recorded this episode about a month ago as of the release date. And a few weeks later, the group behind Measure ULA published a report claiming to show that waiving the tax for new development wouldn't produce any additional housing or very, very little. Suffice it to say that the analysis was poorly done. It wasn't worth setting up another recording at the last minute just to talk about it, but if you're interested in reading about some of the report's flaws, I wrote about it on my blog and you can find a link to it in the show notes. The Housing Voice podcast is a production of the UCLA Lewis Center for Regional Policy Studies with production support from Claudia Bustamante, Brett Berndt, and Tiffany Lieu. You can reach me at shanephillips@ucla.edu or on Bluesky and LinkedIn, and you can follow the show and share your thoughts on our sub stack, uclahousingvoice.substack.com. With that, let's get to our conversation with Jason Ward and Mott Smith.

Shane Phillips 00:02:39
Jason Ward is an economist and director of the Housing Center and Mott Smith is co-founder and CEO of Amped Kitchens and principal at Civic Enterprise Development with experience in real estate development. And he is probably one of the most civically engaged people in this 13,000,000 person metropolis, including having a seat on the Lewis Center's advisory board. Apropos of nothing, both have musical backgrounds, with Jason even having mastered an album of my Seattle friends back in 2016, which I didn't learn about until moving here. Jason and Matt, thanks for joining us and welcome to the Housing Voice podcast.

Mott Smith 00:03:13
Fun to hang out. Yeah. Thanks.

Jason Ward 00:03:16
Exciting to be here. Long time listener, first time participant.

Shane Phillips 00:03:23
And my co-host today, who is also the co-author of one of these reports we're going to be talking about is Mike Manville. Hey, Mike.

Mike Manville 00:03:30
Hey, guys.

Shane Phillips 00:03:32
Jason and Matt, we will start, as we always do, with the toughest part of the interview. Tell us about a place you know and love and want to share with our audience. Give us a tour. Who's first?

Mott Smith 00:03:40
Oh man, a place I know and love. I mean, the place that I know and love is Los Angeles. And I feel like you've gotten a few of these from people along the way.

Shane Phillips 00:03:48
It's a big place.

Mott Smith 00:03:50
It is a big place. Well, maybe, maybe I will take you on a little tour of the historic core of downtown LA, where I lived for a time before COVID. And it feels like just an incredible pre-war city. The architecture is amazing. the number of independent restaurants and bars. Even today, post-COVID is still some of the best in the city. And so many undiscovered gems. Maybe my favorite thing in all of the historic horror is St. Vincent Alley, which is a little alley north of 7 th Street inside the St. Vincent Jewelry Mart, which used to be a large department store. And the alley was, of course, the loading for that department store. And now it is filled with Middle Eastern restaurants and shops. And you can get a barber. Yeah, you get some of the best kebab in the city and see people playing backgammon and smoking hookahs. And it's really one of those things that you you dream about in a big city, finding like a little undiscovered pocket like that.

Shane Phillips 00:04:56
Right in the middle of downtown, too.

Mott Smith 00:04:58
Yeah.

Shane Phillips 00:04:59
Jason, how about you?

Jason Ward 00:05:00
So I'm going to give you a brief tour of Oak Park, Illinois, which is where I moved from LA about a year and a half ago. This is a near suburb of Chicago that's basically across the street from the West Chicago neighborhood of Austin. It's a 4.7 square mile rectangle. It's home to about 53,000 people in about 23,000 households. It is the childhood home of Ernest Hemingway, and it's also where Frank Lloyd Wright began his career. As a result of that, Oak Park is home to about 30 Frank Lloyd Wright-designed homes, including his own home and studio, which is a big local tourist attraction and is really worth the trip if you ever come here. Oak Park is pretty diverse demographically and is also fairly unusual for Chicago suburbs in that it's extensively connected to the city with public transportation. It has three trains that go into the city and a number of buses. And it's also a very walkable and bikeable place. It has a very diverse housing stock with a lot of kind of ridiculously large ornate houses, but also a lot of pretty small, affordable homes, as well as a large stock of apartments that range from small two flats all the way up to new high rises. And most of those rents are actually quite affordable, at least based on my California experience and living in Chicago proper. It has a really lovely downtown that has a renovated movie theater, a big library, parks, shopping areas, etc. It's a super free-range, kid-friendly place. I moved back here because of my history of living in Chicago. Before I moved to LA, we had to move back to the Midwest. Over the time we lived in LA, we used to come here and stay with a friend quite a bit. And I became really just enamored by the sort of self-contained nature of this place as a little town that's really pretty easy to live in. I have a friend who lives here who said something that really resonated with me where he said, the schools are good, but they're not too good. It's kind of a place that's just got a lot of different people from a lot of different walks of life. It's a really nice place to live and exist. Even though I go into the city pretty regularly, I spend a lot of time out here just kind of walking, biking, and doing local things.

Shane Phillips 00:07:08
Are those ridiculously big houses, were they built as ridiculously big houses or are they consolidated like a lot of OG ridiculously big houses like built in the built in the 1800 s?

Shane Phillips 00:07:21
They're not like three flats that were converted into a single family home kind of thing. Not typically.

Mott Smith 00:07:26
That's common in Chicago.

Jason Ward 00:07:27
There's stately manners of the of yesteryear that were built by sort of people who didn't want to live in Chicago and had a lot of money.

Mike Manville 00:07:35
Yeah, I can. My uncle has lived in Oak Park for decades and I can second all that. It's a wonderful place.

Shane Phillips 00:07:41
So we're going to be wrapping up our Incentives Series over the next few episodes. And what better way to do that than by talking about taxes? Of all the research topics we could cover on the show, I can't really think of another where ideas about incentives and disincentives and unintended consequences feature as prominently as tax research. For this episode, we're going to be talking about a couple studies published last year by our very own Lewis Center for Regional Policy Studies, one by Mike and Mott and the other by Jason and I, which was co-published with the Corporation, where he works. With these reports, we are returning to the subject of real estate transfer taxes, something I've written about several times since 2020. And we have even talked about on the podcast way back in episode 33 with Tuka Sarima. Transfer taxes are taxes on the sale of real estate, usually some fraction of the sale price, and while that may sound like a sleepy issue, it has become something of a lightning rod here in Los Angeles and throughout California after the November 2022 passage of Measure ULA. a big transfer tax hike on properties over $5,000,000 to fund affordable housing construction and renter assistance programs in the city. Since then, multifamily production in the city is down by almost 40% from an already low 12,800 units in 2022, to fewer than 8,000 units in each of the past two years. Productions generally fall in elsewhere too, but the big dip in LA has raised questions about how much Measure ULA is to blame. There have been lawsuits seeking to repeal the tax and state laws aiming to rein it in, none successful so far. There's a proposal by one of our own city council members, now also a mayoral candidate, to make some pretty sensible fixes. And there's a statewide initiative that just qualified for the ballot that would blow up Measure ULA entirely, along with every other transfer tax in the state and a bunch of other state law besides. And there have been critiques of the research we're discussing today, along with a not insignificant number of personal attacks and pretty egregious misrepresentations of the data by some of those same critics. But for all that intrigue, I think the best reason to talk about Measure ULA here today is that it provides such a great lesson on incentives and unintended consequences. So much so that it might as well have been designed for that purpose. We found in our research that the implementation of ULA caused a sharp decline in higher value sales within the City of LA compared to neighboring jurisdictions without increased transfer taxes, that this dip in transactions is costing us a lot in foregone property tax revenue, and that it's also associated with declining multifamily housing production. So let's talk about those findings and what we can learn from them, whether or not you're based in California, which most of our listeners are not. I've mentioned unintended consequences a couple times already. Not coincidentally, the first report on our docket is titled Unintended Consequences of Measure ULA. and this one's by Mike and Mont. Mike, I'm gonna ask you to field this first question because you did a really great job explaining it when you presented for our Lewis Center Housing Lecture Series last spring. Tell us the basics of what Measure ULA actually does, and then give us a bit of a primer on tax policy design to explain why we would expect ULA to have some unintended consequences, even without the benefit of hindsight, which we have now. I think this point is important because a lot of the attacks on your research and ours are sort of implicitly framed as though our findings are inconsistent with prior research, and I don't think that could be further from the truth.

Mike Manville 00:11:30
Yeah, so Measure ULA is, as you mentioned, a real estate transfer tax. Measure ULA differs from a lot of typical transfer taxes in a couple ways. One is that the tax base is quite narrow. Rather than applying to a lot of transactions or most transactions, it's restricted to the very top of the market. So the lowest price at which Measure ULA can kick in when it was first passed, it rises with inflation, but when it was first passed, the lowest price at which it would kick in was $5,000,000. The second way it differs is that that narrow base is paired with a fairly high rate. So whereas you might hear about transfer taxes in other places that apply a 1% tax to all single family home transactions or something like that, When you hit that 5,000,000 mark in measure ULA, you get a 4% tax. And then if you hit the 10,000,000 mark, and again, these have gone up each year with inflation, but you hit the 10,000,000 mark, the rate goes up again.

Shane Phillips 00:12:23
To 5.5%. 5.5%.

Mike Manville 00:12:26
Yes, thank you. And so there's a couple things to note about that. One is just that if you back up and think about, you know, what we tell students in an introductory public finance class, One of the first concepts we explained is that any tax that you decide to levy is going to have some combination of two effects. It's going to either raise revenue or change behavior. And before you do anything else, you as the governing authority that wants to levy this tax, you have to decide which of those is more important to you. Now, oftentimes it's to raise revenue. Governments need money to do various things. Measure ULA wants to raise money for housing assistance and affordable housing. But sometimes we really do want the tax more to change behavior than to raise revenue. Sin taxes famously are kind of considered win-win taxes because if they raise a bunch of revenue, that's great. But if they also lead to people drinking less or smoking less or things like that, that's also a welfare gain. And so when Michael Bloomberg was mayor of New York and presided over a big hike in the cigarette tax, he famously at a press conference was asked, you know, how much revenue do you want the city to get from this? And he said something to the effect of, My dream is that we tax smoking out of existence and raise no revenue at all. That's an example of we're actually putting this tax in place because we want to change behavior in the revenue secondary. But the big point is you got to know what you want to do. And if your goal is to raise revenue, there is a fairly standard rule of thumb that what you want to have is a low rate over a broad base, which is to say you want to tax a lot of things but fairly lightly. And you want to do that because if the rate is too high or the base is too narrow, you could end up in a situation where people try to evade the tax. And in evading the tax, you get the behavior change that you don't want and you don't raise any revenue.

Shane Phillips 00:14:16
Or you raise less.

Mike Manville 00:14:17
or you raise less. Yeah. So in a big abstract world, you don't raise any revenue, right? So in a textbook world. So if you just look at measure ULA without knowing anything else about it, except that concept, you would say to yourself, okay, well, this is a tax that's relying on a very narrow slice of the transactions that occur in the city of Los Angeles to raise a lot of revenue. And in addition to that, it has built into its structure two very big what we call notches, or sometimes called cliffs. These are places where a very small increase in the value of the transaction leads to a huge increase in the tax burden. And so the easiest way to illustrate this is just you're at $4,999,999. You sell that property for $1 more, your tax goes from nothing to $200,000. Well, what does the rational person do there if their property is right around $5,000,000? They might withhold it from the market. They might try and figure out some other way for it to change hands and be compensated for it. They might try to evade the tax. So this is a tax that, I mean, obviously not intentionally, but it looks like a tax that's almost designed to induce behavior change and designed not to get a lot of revenue. And the last point I'll say about this is just that if you look over it, the literature on transfer taxes isn't huge, but if you look over it, almost all of it is just empirically showing that even the best of these taxes reduce the volume of transactions in the jurisdiction where they're levied, right? Because you're always going to get a little bit of behavior change, even if you get a bunch of revenue. But then look at Measure ULA, and it has conditions built into it that seem designed to exacerbate that problem, right? By having the base be very narrow, having the rate be rather high, and then having the rate be structured so that it's not marginal, and then instead it has these big jumps, and those big jumps just create an enormous incentive for people to withhold their property, evade the tax, things like that.

Shane Phillips 00:16:08
Yeah, and I think it's important to note here that part of the reason for that structure is the political constraints on having to pass a tax, right? Like, it is much easier to pass a tax when you can say, hey, this is only going to hit people who own properties worth over $5,000,000. That's not you, 95, 98% of voters. And so you should be perfectly comfortable approving this, right?

Mike Manville 00:16:32
100%. I mean, politically, this was an extremely rational thing to do if your goal was to win this election and get this tax implemented. And I think the proponents of the tax were really aggressive in that messaging, right, that this is a tax on fat cats and rich people and millionaires and billionaires, as they like to say, and it's not a tax on the average voter. And because the thresholds rise with inflation, they could also say and did say, and it will never be a tax on the average voter.

Mott Smith 00:16:57
If it doesn't affect you today, it will never affect you.

Mike Manville 00:17:00
You should vote for it. And so this is, I think, just like example 6,800,000 of the facts that like political rationality is not necessarily economic rationality.

Shane Phillips 00:17:09
Yeah, yeah. And since we're talking about behavior change and expectations here, we should talk about what the tax was projected to raise in terms of revenue and also what it has raised so far. The projections when this was being campaigned on were revenues of $600,000,000 to $1,100,000,000 per year. And right after it passed and was implemented in April of 2023, after being approved by voters in November 2022, the first year and a half, it raised about $480,000,000, which is around $300,000,000 per year. And there was a lot of, you know, hemming and hawing and kind of I told you so's about like, you know, this is changing behavior is not raising nearly as much as was expected. I will say in calendar year 2025, according to the ULA dashboard kept by the city of LA, it did raise it looks like about 520,000,000. So it's it's approaching those projections. But you know, we're more than three years into this now. And we're still not at that kind of lower bound. But I wanted to, you know, make that point and just kind of level set for where things started, where things are at now. And, you know, I think it's it's plain to see that the reason we have not met those projections so far is some amount of behavior change has happened. So Matt, I want to turn this to you as the man in the chat who has actually funded and built housing in the real world. How could a transfer tax make a development project less financially feasible and therefore less likely to be built? We're going to hold off on talking about Jason's and my research on measure ULA and multifamily production. But I think it's still important to explain this early on so that listeners understand the stakes of these policies and how it goes beyond simply raising more or less revenue.

Mott Smith 00:19:00
Yeah, it's a great question, Shane. And, you know, it's really easy to say Well, the tax is somewhere between four and five and a half percent. And, you know, when I go buy dinner and I'm paying a sales tax of whatever it is. that it's a nominal surcharge and shouldn't really affect the transaction. I think a lot of the people who voted for this assumed that this was just a tiny margin on these very big deals and shouldn't really change behavior very much. But the truth is that the way the tax is structured, bottom line, it could reduce the profitability of a development by anywhere from 30% to 50%. which is because right now, if I were underwriting a new project, I'd be underwriting hopefully to about a 20% margin, meaning that what I could basically sell the project for, if I built an apartment building, got it leased up, sold it, what I sell it for after lease up is going to hopefully be about 20% more than the sum of all of my costs, including financing and everything else that it took to get there. And people might say, well, a 20% margin sounds quite fat. That's maybe more than a normal person should need to do a project. You have to remember that however many dollars that 20% represents are going to be divided over however many years it takes me to build that project. And so there's that, and then there's the risk and there are all kinds of other things, but 20% is a very reasonable margin. Now, if I fall a little short of expectations, and I only get, say, 12% or 15% margin, I still have a profitable project. It's not as profitable as I thought. When I'm looking at deals, I'm going to be thinking, could I squeak out at least 15%? Yes. Okay, I'll do it. Can I possibly achieve 20%? Great. Yes, I'll do it. That's the range I'm looking at. A 5.5% tax which primarily affects the value at the end of the deal, is going to reduce. If it's a 20% margin on the project, I'm only going to walk away with 14.5%. If I only got a 15% margin on the project, in reality, the tax is going to take out 5.5% and I'm going to be left with 9.5%, which is below my strike price, basically. And so this tiny little tax eats up mostly the margin at the end of the project in a very significant way.

Shane Phillips 00:21:26
Can you say a little bit more before we move on? Can you say a little bit more about how the largest cost of this tax for development projects anyway is actually paid after you build the project? Because I think that might not be intuitive to some listeners.

Mike Manville 00:21:39
So I think a lot of what Mott and I's report talked about was that this reduces the volume of transactions, right? Like properties just don't change hands. And so to move to this next step of like, well, how does this impact development? You do have to understand or keep in mind that like one of the biggest inputs to development, of course, is having a parcel. How do you get a parcel? You buy it, or you're sitting on it already. And I think when you bring that up, you're like, OK, well, in some ways, this is a tax on an intermediate good, right? It's when someone buys a single family home from another person, they're just going to live in it. That's sort of like what we call a tax on final goods, right? The product is done. But when you are acquiring a parcel to develop it, that parcel is an intermediate good and it has to be improved. And I think, you know, when this was brought up before ULA was passed, what proponents of the tax said, and it sounded quite reasonable, was like, well, as long as the developer, after the new project is done, doesn't sell it, right, they'll never pay the tax. And so how could this possibly impact development in the city? And I think that was quite persuasive.

Shane Phillips 00:22:43
This is how I was thinking about it at the time, because a lot a lot of projects are not sold. Many, I think the larger projects in particular are. But, you know, if you just decide not to sell and hold on to it, then you don't pay the tax. So like, what's the big deal, right?

Mike Manville 00:22:56
Yeah. And I think what Mott can explain is two things, right? Two reasons why this isn't quite right. And the first one is in a situation like that, a developer is likely to get outbid to acquire the parcel in the first place. In a second place, if you do have the parcel, the math starts to not add up. Your financing might be disadvantageous and so forth. Matt knows this much better than me, so he can kind of explain it.

Mott Smith 00:23:20
Yeah. Everything Mike said is totally true. What some people might have thought was a relatively small tax turns out to be a big drag on profitability for projects. It's because if I'm buying a piece of land for, say, $2,000,000, Then I'm investing $8,000,000 in building a small apartment building on it. Then I hope to sell it for say $13,000,000 or $12,500,000 or something like that. I'm not being taxed on what I spent to buy the land. I'm not being taxed even on what I spent on building the project. I'm being taxed on the final sale price. My hope as a developer, was that something like 20% of that final sale price of that $12,500,000, that would be my profit. That would be my compensation for spending three to five years building this thing and taking the risk that I've taken and sharing with my investors, et cetera. And so 20% of $12,500,000, if I'd taken 5.5% of that out to pay my ULA tax, now my profit has been cut by 25%. That is a very significant reduction of profit and probably enough to give me a serious pause about whether or not to do the deal. Now, the ULA tax actually impacts project profitability in two other ways that need to be put on the table. The first is that financiers pay the ULA tax when they foreclose on a property and when they auction that property off if they have to. So if my lender is trying to decide how much money to give me as a construction loan, they're going to reduce that amount by whatever it costs them in some potential foreclosure in ULA tax, and they're going to deduct the amount that they would have to pay in a ULA tax when they auction that property off to a buyer. So my loan amount might go from, say, 60% of my total costs down to 50% of my total costs just because that tax there. Now I've got a project with a smaller profit that is having to do more work paying for a larger chunk of equity. And that's a strong disincentive to do a deal.

Shane Phillips 00:25:32
Yeah. And the important point there is that the equity is the thing you're trying to earn that higher return on. And this is the subject of our previous two episodes, in some ways, about the Shared Prosperity Rental Housing Report that I worked on, which is really all about the higher the leverage, the higher the potential profit rate. And what this is actually doing is reducing your leverage. from what is already a pretty low, you know, 60% loan to cost, let's say on a construction loan to maybe 55 or 50%. And so the exact same amount of profit even, even if there weren't a reduction at the end from the tax, would still lower your rate of return because a larger share of the project is funded by equity rather than debt.

Mott Smith 00:26:17
Absolutely. Yeah. It's a fact of life in finance that debt is less expensive than equity. It takes a lot more return to satisfy equity than it does debt. And so the bigger share of your project finance with equity, the bigger return you actually need. Now, I said there were three ways that ULA was hurting development feasibility and I named two. The third one is actually on the acquisition side. that a lot of the inputs, a lot of the property inputs to development are above the ULA threshold. If I need to pay the ULA tax in order to buy a $5,000,000 or a $10,000,000 piece of land, for example, it's going to make it harder for me to be able to match what a seller wants to purchase their property. I think Mike alluded to this a little bit, but if I'm trying to buy a car wash, the old cliché of the car wash turning into an apartment building, and let's say the car wash is a clean $6,000,000, anybody buying that car wash in today's LA is going to have to build in the ULA tax to that purchase price. The seller is going to have to be willing to accept a price that a buyer would pay minus the ULA. And so at $6,000,000, just doing the math really quickly here, 5.5% of that would be...

Shane Phillips 00:27:35
It would be 4%. 4%.

Mott Smith 00:27:36
Oh, thank you. You're right. It would be 4%. So about a quarter of a million dollars. Yeah, yeah. $240,000 exactly. So somebody who wants to keep that car wash a car wash would just have to subtract $240,000 from their underwriting. But if I'm planning to spend another, you know, $20,000,000 building an apartment building there, and maybe it's going to sell for call it $24,000,000. And now I'm at the 5.5% range. And that means that I would have to pay a $1,300,000 ULA tax at the exit of my project. So my purchase power for that car wash is actually about a million dollars less as a developer than it would be as somebody who just wants to keep it a car wash. And so, I think what this tax structure would predict is that more of those large transactions would be for status quo purchasers of properties as opposed to developer purchasers of properties.

Mike Manville 00:28:31
I just want to emphasize one thing because you could be listening to this and still being like, well, okay, too bad for the developer. But on the other hand, just don't sell the apartment after you build it and then you can buy the car wash and you don't have to build the ULA tax in. I think Mott's alluded to this, but I want to emphasize it. One is just the way a lot of finance works for these bigger, higher density apartment buildings is your financers, they want you to sell property. They want you to unload it. You're not going to get the money if you don't. So sometimes you just don't have a choice.

Shane Phillips 00:29:02
They want to be paid back in five years, not slowly over 30.

Mike Manville 00:29:06
And they're not going to change just because the city of Los Angeles passed an idiosyncratic law. Like that's what they want. But the other issue is just even if you didn't have plans to sell it, the lenders or the people you're borrowing money from, they have to build in the possibility that everything will go sideways. in which case they need to take whatever you constructed and offloaded and sell it, and when they sell it, they'll pay the tax, right? So even if you're building to hold on to something, when you're going to get money to do that, the person giving you that money is factoring in the possibility of having to pay the tax. And both of these things, as Matt says, they put you at a disadvantage relative to someone who looks at that car wash and just says, I think I'd like to own a car wash. So I think one of the points we make, and it pairs nicely with the report you guys wrote, is that as a first order consequence of Measure ULA, you should just expect fewer transactions. As a second order consequence, the transactions that occur are more likely to be just the property itself changing hands and less likely to lead to development. And in a city that needs more development, that's actually a really serious loss of welfare.

Shane Phillips 00:30:18
Mm hmm. And a bit of important context I'm realizing we did not say is that Measure ULA applies to essentially all transactions over $5,000,000. That's right. The main kind of slogan around it was a mansion tax, but only roughly 50% of revenues from Measure ULA actually come from single family homes. And then the rest is coming from commercial properties, multifamily, industrial, a mix of all of those things. And so, you know, the other point I'll make here is this idea of, well, maybe you should just change your business model so that you're not selling at the end of construction, even if that is feasible. And I imagine there would be some adjustment over time where you'd see a little bit more of that kind of behavior one way or another. a little bit less of the kind of sale approach. If that was actually a viable strategy, you would still not raise any revenue from taxing these recently completed developments. And so, like, what's the point in taxing them in the first place if you think people are eventually going to find ways to avoid them? This will take us back, I think, to the end of the conversation when we get into recommendations and solutions and so forth. But I think that's important context as well. One other thing on context here, because we really, I don't know, we keep circling around Prop 13, but we never really had an episode about it. But I think it's important to put ULA and other transfer taxes in a broader context, which in the case of California does require talking about Proposition 13. and other restrictions that we put on raising government revenues through fees and taxes. In addition to capping our property tax rate at 1%, Prop 13 essentially freezes the taxable value of a property at its sale price. It can go up 2% per year. And that causes properties with similar market values to be taxed at sometimes wildly different effective rates. You can have A $1,000,000 home that has someone who just moved in and is paying $10,000 a year in property taxes, living next door to someone who bought 30 or 40 years ago, home's worth exactly the same amount of money, but they're paying $1,000 or $2,000 in property taxes, 10 or 20% as much. We could raise a lot more revenue with fewer unintended consequences by simply taxing all properties at the same rate rather than at different rates based on when it was purchased, but that requires changing our state constitution, so it is a very big lift. something we have yet to achieve since Prop 13 was approved way back in 1978. I think it's fair to say that one reason transfer taxes have proliferated in California, and there's now more than a dozen cities that have higher rates than the kind of base level, is that raising more from property taxes is essentially off the table. I'd like to have you guys build on that observation, and I'm going to put the question to you this way. What are the strongest arguments in favor of transfer taxes? And what are the reasons we would probably prefer to raise more revenue from property taxes if we could? We're going to spend most of our time here on the problems and challenges with transfer taxes, or at least with Measure ULA. So I want to make sure we acknowledge here early on that there are some good reasons for them, both technocratically and politically, certainly.

Jason Ward 00:33:31
Well, so I think, you know, the main reason to not over rely on transfer taxes is goes back to what Mike has already said, that essentially transfer taxes function as a kind of tax that has a high probability of changing behavior, specifically if you make it very narrowly targeted, right. So if you actually want to raise revenue, Instead, what you're going to get is a mixture of revenue raising and changing behavior and especially if that behavior is something that you think is not bad or is it even perhaps quite good, then that's really a strike against that. Property taxes on the other hand are essentially – and then the key thing about transfer taxes is that people can opt to participate in them or not, right? Unless it's a distressed situation, people cannot sell or they can alter the price at which they sell and these other things, right? Property taxes have this much more inherent appeal, which is that if you own property, you're in a state of owning property. You're not electing to do something marginally. And this goes back all the way to early sort of proto-economists like Henry George who said, this is an appropriate way to raise revenue. You're not distorting behaviors. because land is owned. If someone's in a state of owning land, you can essentially extract some share of that value over time for owning that land. And I think there's a lot of wisdom to that. Proposition 13 has really hindered the state's ability to sort of play off of that mechanism and has made almost all governments in California rely to a much larger extent on revenue that comes from activities that are essentially discretionary that people can decide to do or not to do.

Shane Phillips 00:34:59
Mm hmm. Sales taxes, income taxes, taxes on development fees, various fees, development fees, et cetera, et cetera.

Mike Manville 00:35:07
Yeah. And so if you were to if you were to build the strong case for a transfer tax, I mean, I think you would have to start from just, OK, we're in a place where the property taxes is essentially off the table. Right. And that's California. So if you have to choose from this suite of other taxes that are based on decisions, maybe a transfer tax starts to look pretty good. And I think even if you're not in a place like California, You know, why does Toronto have to transfer tax and things like that? And part of it may be politics. But I think if you were to make an argument about it, you might say something like the following, which is to say, the property tax, it has some good points to it. You know, the joke in economics is it's a combination of a very good tax, which is a tax on land value and a very bad tax, which is a tax on structural improvements. But it does have some good points. But it's incredibly unpopular. And it's incredibly unpopular because it is a tax on wealth. Wealth taxes have two things that I think make them unpopular. One is that wealth's correlation with income can be quite variable. And so you get these fears of people who are house-rich but income-poor getting heavily burdened by the fact that their property has appreciated in value. And of course, you can say, well, that's a good problem to have, but it doesn't play very well. Leading up to Prop 13, you had these stories, which may or may not have been true, about senior citizens seeing their tax rates rise very much, even as their income was relatively stagnant.

Shane Phillips 00:36:24
Yeah, I mean, that was I from my like, not even born by that time perspective, it seems that that was the main argument for prop 13. Even if not everyone was in that position, but it was just a very sympathetic argument.

Jason Ward 00:36:36
It wasn't the main empirical fact.

Mike Manville 00:36:39
It's a very sympathetic argument. And of course, this is why most places, even if they don't do a prop 13 have some sort of mechanism to prevent that from happening. You have circuit breakers and other things you can put into property taxes. But the other thing that is sort of central to a wealth tax that makes it very unpopular is that the government sets both the rate and the base, right? The government says, well, you're going to be taxed at 5% and also, we've decided your property is worth this much. The government makes a good faith effort to do that but it's very hard for a person not to think that the game is rigged. With an income tax or a sales tax, the market sets the base. You made $400,000 last year. You bought a $20 smoothie at Erewhon, right? So the base is set by the market. Those two things definitely go hand in hand, the $400,000 income. If you make $400,000 and you're not spending your money at Erewhon, what do you do? I do neither of those things, just for the record. If you think about a transfer tax, well, what's appealing about that? Well, one, it is in some ways a tax on your wealth, but it's a tax on your wealth at the moment it turns into income. You just sold this asset and got a bunch of money. The fear that you're income poor goes down as long as the sale was not a loss. That's a very important point. You would have to say like the sale has to yield some profit. The second thing it does is, again, now the market has set the base. How do we know what we're taxing? Well, this is what someone was willing to pay you for your house. So it no longer has this illusion of the government being quite arbitrary in setting the base. And then I think a third point, to go back to Jason's allusion to Henry George, is that in a market like coastal California, you could make an argument that a lot of this profit was under your house increased in value and you made a big profit off it not because you read the kitchen or your great person but because you live in hollywood and los angeles economy took off like a rocket i mean that's that's society's work and not yours and it's appropriate. for society to take some of that back. So a carefully structured transfer tax could have, especially in an environment where the property tax is very constrained, some nice attributes to it. But the emphasis here is on carefully constructed. Yeah.

Jason Ward 00:38:52
Yeah. Yeah. And one thing I would say, just to sort of follow up, and this relates back to what we were talking about, about final goods and intermediate goods, is that when you think about transfer taxes on things like single family homes, these are essentially people buying something that's for them. It's like a use good, right? I'm going to buy a home to live in. Most people have really specific locational preferences and things like this that will make them less elastic to taxes, right? So, if you want to live in Palisades or what have you, you really want to live there probably and you're not going to substitute and buy a condo in Koreatown or whatever because someone put a tax on something. I think there's a case to be made that you want to find the most inelastic segment of some larger market to tax. And that really is where you get into this idea of like a mansion tax. Many people with excess income are probably pretty dead set on buying a home somewhere. But in this same framework, you can think of apartments entirely as an intermediate good and that they're a good produced to generate revenue to house people, etc. No one's buying it because I want to have this apartment complex all to myself or whatever. So these are really investment goods and these are much more elastic to small changes in taxation. That's right.

Shane Phillips 00:39:58
Right, because there's many places you can invest your money.

Mike Manville 00:40:01
I mean, this is a general point about real estate development overall, when people try to tax it specifically, rather than just high incomes, wealth, etc.

Shane Phillips 00:40:10
What you're really doing is just pushing people toward investing elsewhere. You're not lowering the profit necessarily.

Jason Ward 00:40:17
Whether on apartments or something else entirely, you know, another use of capital.

Shane Phillips 00:40:21
Well, you're kind of jumping ahead here and addressing this defense you'll hear about transfer taxes that essentially boils down to sellers have to sell. And I think the point you made is really the key one there, Jason, that may be true, probably is true in particular for a lot of owner occupiers, people just buying a home to live in it. But that is, of course, the largest group exempt from ULA because the vast majority of single family homeowners do not own homes worth 5,000,000 dollars, even in Los Angeles. Another thing you'll hear is, you know, we already pay three percent, six percent, whatever in agent fees when we buy and sell our homes. And so what's another four, five and a half percent? And we've talked about some of that. But another point to make here, a small point, but an important one is just that as the value of these sales goes up. those fees become much more negotiable. And so someone selling $100,000,000 apartment building is probably not getting a 3% or 6% fee on that, like even a million dollar fee, a 1% fee would be a just incredible amount of money for selling one building. So in many ways, that assertion doesn't really hold true.

Mike Manville 00:41:32
Really quickly, the point that we make in the report is that you own your single family home, you get a job in another state, you got to sell your house. Sure, because you need the money to go buy another house where now you're moving your family to. And as you alluded to, Shane, it's a very important point about ULA. Those people aren't taxed. The base consists almost entirely of people who have more options. These are properties that are investments. Even these very large mansions can be used. They can be rented out. They can be put on Airbnb, what have you. You can just sit on them, and so you come back to this point that the people who have the least ability to sort of evade the tax are already exempt from it, and the people who have the most ability, the tax relies almost exclusively on them for revenue, and that's a perverse setup.

Shane Phillips 00:42:23
Okay, so I think that's enough on what prior research and economic theory tell us to expect from attacks like Measure ULA, and that background is really important, so I'm glad we covered it pretty well. But now let's get into our research on ULA itself. As we've mentioned, high rates and a narrow base will tend to lead to behavior change. with avoidance behaviors going to the top of that list. And that's exactly what you found, what we found. In your case, Mike and Matt, about a 50% drop in transactions for properties subject to the tax. And that's above and beyond the drop seen in other jurisdictions over the same time period. And that gap has persisted. So tell us more about those findings. And I think it's also useful to just explain how ULA really kind of has the perfect conditions for a natural experiment to measure its effects.

Mike Manville 00:43:13
Well, so I should say I paid almost no attention to Measure ULA when it was passed. I'm a little embarrassed to say that, but I lived in West Hollywood, so I didn't vote on it. There's a lot of things on the ballot every year.

Shane Phillips 00:43:23
Yeah.

Mike Manville 00:43:24
But then Mott got in touch with me a little ways in and was like, man, I just feel like transactions are falling off a cliff and it's Measure ULA. And then he managed to get some data from Commonwealth Land, who very generously, they track the county's transactions. And what we were able to do with that, and I'll let Matt talk a little bit more about it, is basically address this, I think, defense of Measure ULA that you heard a lot, which is like, yes, transactions are down after Measure ULA was passed, but that's because they're down everywhere. Right. Interest rates are very high. The macro economy is very turbulent. And these really were kind of rough times for the real estate industry. So there's absolutely truth to that. But because Measure ULA went into effect on a particular date for a particular set of transactions in Los Angeles, and then didn't affect transactions below $5,000,000 in Los Angeles, and also didn't affect any transactions that would have occurred in neighboring cities in LA County, we had the opportunity to basically carry out an analysis called the difference-in-difference analysis. And the short version of the difference-in-difference analysis is that what matters is not whether transactions in Los Angeles are falling after ULA, or that alone doesn't matter. What matters is are they falling relative to these other places nearby or these other transactions that are proximate that only differ from the transactions above $5,000,000 in Los Angeles in that they are not subject to measure ULA, right? So if you compare what's happening above and below the tax threshold in Los Angeles and what's happening inside and outside of Los Angeles, Suddenly, you clean away a lot of these potential confounders because Los Angeles County, if you compare Los Angeles and Glendale, Los Angeles and Burbank, interest rates are the same. The macroeconomic conditions are the same. The unemployment rate's the same. All of that goes away and you can get much closer to just isolating the effect of Measure ULA. It's what we call, for that reason, a natural experiment. You're able to see what happens in Los Angeles before and after Measure ULA, but then you're also able to see what happens to jurisdictions with and without Measure ULA altogether. And now, is it a perfect sort of design? No. And we can talk a little bit about that. There's always a little bit of concern, but it gets you awfully close. That's basically the analysis that we ran, looking at both the quantity of transactions that occurred in Los Angeles and also the probability that a transaction in Los Angeles would occur above that tax threshold.

Shane Phillips 00:46:00
Yeah, yeah. So, Matt, do you want to add to that sort of what you guys found, as Mike said, using this data from Commonwealth Land Title Insurance Company that really is just assessor data, but conveniently very cleaned up for us to work with?

Mott Smith 00:46:15
Yeah, yeah. Commonwealth Land Title Insurance Company was very generous in providing us with these data. And I just want to acknowledge that I am a guy who says these data as opposed to this data, in case that's grating on the ears of some of the listeners. It's the job of title companies, basically, to track information like this. They usually have relationships with county recorders' offices and others to get the best, most granular information. This is really good information that we got from them. One cool thing, from a natural experiment perspective, is that both LA City and LA County outside of LA City prior to measuring ULA had an almost identical volume of transactions above the ULA threshold, above that $5,000,000 threshold. It's really easy just visually to look at the graph and see what happens before and after the tax takes effect. As Mike pointed out, what we see is very – it's totally predicted by all of the most basic economic models that right before the tax took effect in April of 2023, there was a spike of transactions above the threshold just in LA City. Right after the tax took effect in April of 2023, there was a massive fall-off of transactions above $5,000,000 in LA City. I think that the question that a lot of us had on the research side is, was that going to be a persistent drop, or was that just the hangover from the spike before the tax took effect?

Shane Phillips 00:47:51
Sort of the the assertion by someone defending ULA would basically be that, yes, of course, a bunch of people sold just before the tax went into effect because they wanted to get around paying the tax. But the dip you see after is really just enough to kind of offset that increase in sales before, as opposed to being something more persistent and the trough post ULA being much larger and longer than the peak just before it. Exactly that there was a one-time rush to sell that distorted things and then it and then everything's back to normal Yeah, right and the people you're the backers of measure your lay were very quick to conclude that that must be what happened And that we should all relax about it.

Mott Smith 00:48:34
The market would just adjust and And as Mike pointed out, we have data up through the end of 2025, up through 1231, 2025, and there is no sign of the transaction volume of the city coming close to the baseline at all. It seems to be a persistent drop as compared to the County of Los Angeles. And as one interesting aside, we're going to talk about building permits, I'm sure, in a little bit. But the backers of Measure ULA put out an email, I think it was a week ago or so, talking about how great it was that building permits haven't dipped at all because of Measure ULA. And a close read of the email, they actually said permits in all of LA County haven't dipped because of Measure ULA. And this is actually not surprising, because what we would expect to see from this is a shift of building activity from the city of Los Angeles to the county of Los Angeles, because we are a region and we have a regional market for housing. It's interesting to see that at the county level, things have remained relatively consistent.

Mike Manville 00:49:40
And just with respect to that issue of the big surge in sales that occurs right before Measure ULA, not only does the graph show that the downturn, the difference between the LA and the rest of the county persists well after that, but when we did our statistical models, there's all sorts of controls built into them. And in a number of the models, we just explicitly controlled for that period where that run-up occurred. And so when you eliminate that trough or control for that trough, the magnitude of the effect goes down a little bit, but not by much. Which is to say, yes, part of what you see, there's no question, was a rush to sell. But when you control for that, what you still see afterwards is there's just less transactions happening. And why is that? Because again, the tax falls on these particular types of properties where the owner really doesn't have to transact if they don't feel like it's optimal.

Shane Phillips 00:50:28
And our reports came out in April of 2025. And the data in Jason and I's report went up to March of 2025, your guys's came out a little earlier. And so it went up to December of 2024, which was, in our case, 24 months after ULA was adopted or implemented, and in your case was 21 months. And over that period, you do see a kind of convergence between the city of LA sales over 5,000,000 and these other jurisdictions in LA County. So, you know, it was still a very large gap, but you could plausibly make the argument that it's just going to keep converging and eventually the lines are going to come back together and everything's going to be good. And I was frankly surprised by the data we looked at recently. We got data through I think either September or December of 2025 from Commonwealth. And the convergence has basically stopped. This like 40-50% drop in Los Angeles relative to these other jurisdictions is holding pretty steady. And that was striking even to me. I was pretty surprised by that. So I want to make sure we move on here. And the most obvious downside to this big drop in large dollar sales is that measure ULA raises less revenue than it was predicted to. And raising revenue is the whole purpose. Behavior change is not. But that's not actually the focus of either of our studies. And Mike and Matt, yours is mainly about the second order effect of declining sales on property tax revenue. As you put it in the report, quote, measure ULA has been portrayed primarily as a new source of revenue. But this portrayal is incorrect. If the measure deters summary assessments, it will raise revenue through one channel, but reduce revenue through another unquote. So tell us what you mean by that and then give us a sense for how big a countervailing effect we're talking about.

Mott Smith 00:52:20
OK, so because Proposition 13 caps the amount that assessments can grow for a property that hasn't changed hands or been developed at two percent per year, If we want our property tax receipts to grow faster than a 3% rate of inflation, we need to have property sales and we need to have development. If there were no property sales and no development, then over time, property tax receipts would grow at 2%, inflation would grow at around 3%, and we'd end up with less and less money in the public coffers. So, sales and development are really important to keeping our public funding where it needs to be. And property taxes, as most people know, in California go to the county, they go to the state, they go to the city, they go to the schools. Particularly at the county level, they are the primary source of funding for social safety net programs and things like that. I should also add that when there is a sale of property, the assessed value typically doubles historically.

Shane Phillips 00:53:25
That's just on average, yeah.

Mott Smith 00:53:27
On average. When you're developing a property, the increased assessed value can go up by 5 x, 6 x, it can go up quite a bit more. So, if measure ULA is substantially reducing sales volume above the $5,000,000-ish level in a market, Los Angeles, which represents over half of the volume of the county of Los Angeles, then we're making a substantial impact on our ability to grow property tax revenue over time. Now, Mike and I estimated in order of magnitude of effect of this in our paper. It was a very rough estimate, and we came up with something like a $25,000,000 a year reduced growth rate. It's important to note that a reduced growth rate doesn't mean that you're just losing $25,000,000 a year. It means it accrues and it compounds. Over 10 years, you'd be looking at almost $300,000,000 a year of reduced revenue per year. Now, some researchers at UC Irvine, UCSD, Harvard, Jack Lieberson was one of the name authors on this paper, did their own analysis that was much more detailed and in-depth. What they found is that there's a much greater impact of measure ULA on the potential growth of property taxes than we had estimated in our very rough way. They had calculated that it could be as much as 138% offset. What I mean by that is they had calculated that for every dollar that measure ULA raises in present value terms, reducing up to $1.38 of revenues that would have gone to the normal property tax channels into the county, the schools, the state, the city, etc. It's basically robbing Peter to pay Paul. if Peter is an LA Unified School District student on public assistance and Paul is a measure ULA beneficiary. It's one thing to talk about the order of magnitude here, that again, it's a net loss of public revenues potentially. It's another thing to talk about the shift from one bucket to another bucket.

Jason Ward 00:55:40
I was just going to throw in those authors in that paper, they actually do a range of about 10 scenarios or something where they assume a lot of different things. The smallest replacement sort of revenue offset effect they found was about 22% under some really unrealistically conservative assumptions. The highest one was 138%, as Matt mentioned, under what might be some fairly liberal assumptions. But the sort of modal offset they found was somewhere around 60% to 80%. Really, even if you're looking at a pretty realistic scenario for thinking about this, it's pretty defensible that 60% to 80% of the revenue from ULA is being offset in terms of lost property taxes that cover all kinds of things that happen in the state of California, in LA County, and in LA City.

Mike Manville 00:56:27
Yeah, I mean, I just want to make two points here to reinforce what Jason and Maud said. First is just to re-emphasize that we were so conservative, because we actually ran a bunch of numbers and showed them to people at the assessor's office and they were, I'll take responsibility. I was just like, I wasn't comfortable with how big they were. I want to emphasize this conservatively because I wasn't comfortable with it in part because you really can't always get into big fights about the assumptions you make exactly about how this is going to play out five and ten years from now. That's totally understandable, but I want to come back to the second point because I do think the intuition here really matters. I think it's hard to appreciate, especially if you don't live in California, how much our revenues depend on properties turning over. Your taxes just don't go up if the property doesn't turn over. Under Proposition 13, Disneyland is being taxed at an increment of a 1978 tax rate because nobody has sold Disneyland. When When Arnold Schwarzenegger was first elected governor, and he made this big show of appointing Warren Buffett to be his financial advisor, and someone said, like, what should we do, Warren Buffett, about the state's finances? And he just immediately said, and this is why the next day he was no longer Arnold Schwarzenegger's financial advisor, you got to get rid of Prop 13. And he had this famous example where he just said, look, I have a house in Laguna Beach. I bought it in the 1970 s. It's worth $4,000,000. My neighbor across the street bought a house in the 1990 s. It's worth $2,000,000. He pays 10 times as much as I do in property taxes. And both of us pay less than I pay on my $500,000 house in Omaha. It's just if the property doesn't change hands, it is trapped in a position where it yields a very little tax revenue. Anything that suppresses the transaction, particularly the transaction of valuable properties, $5,000,000 and above, is just bound to have a huge fiscal impact. You can get into arguments over how exactly you want to calculate that, but the logic there is almost inescapable.

Jason Ward 00:58:29
Mike, you guys had a statistic in your paper and I'm probably going to misquote it, so you can correct me, but it was something like 10% of property transactions generate something like 40% of the revenue growth in the tax base. Is that right?

Mike Manville 00:58:42
Yeah, that's about what it was. I mean, Mark probably remembers it with more precision, but it is a huge sort of uneven distribution of that nature, like a power law type distribution.

Shane Phillips 00:58:52
So that is Measure ULA's impact on transaction volume and property taxes. As we heard from comparing Mike and Mott's research to the work by the folks at Harvard and UCSD and Irvine and UMichigan, there's a wide range of estimates. And I think part of the reason there's a wide divergence between Mike and Mott's research and this other project also is that the latter is kind of forward looking, whereas Mike and Mott's is more backward looking just at the past couple of years. In the report, you guys also make the point that the transactions deterred by ULA include parcels likely to be redeveloped after sale. But that's the focus of the report by Jason and me, so that's where we're going to go with what little time we have left. And then once we've said a bit about it, we're going to circle back and talk about what these studies tell us about potential fixes to ULA and principles of good transfer taxes more generally. The second report is called Taxing Tomorrow, Measure ULA's Impact on Multifamily Housing Production and Potential Reforms. Thank you, Chet GPT, for the title. Jason, I will have you start us off here. But before that, I'm just going to quickly note that we independently analyze the change in transactions over 5,000,000 in the city of LA compared to other LA County jurisdictions before and after ULA was implemented. And our results there were pretty much identical to what Mike and Matt found. But tell us what came next, Jason, with our focus on a specific subset of parcel sales.

Jason Ward 01:00:20
Yeah, and just before I tuck in, I'll just build in that we also did our analysis in a slightly different way in terms of the actual sort of math than Mike and Matt did and still came up with basically the same answer. So, it was really insensitive to a lot of sort of different methodological tweaks. But the thing that you and I focused on Shane, because we actually spoke at one time at an event a few years ago, this issue came up. And I will say, I don't like to pat myself on the back that much, because I don't think I'm that smart. But when ULA first was announced, my first thought was, this is going to be awful for multifamily housing production. And I thought it was just almost like, everyone can see that. It turned out that was not the case at all. I don't think I'm usually that much of a crystal ball person or anything, but I think I just thought about these incentives that we're talking about today in a pretty abstract way. To get at that, Shane, you and I connected on this idea of really what is happening to multifamily development. really any reasonable circumstances of thinking about how to address affordability in LA and in Southern California more broadly, apartments are maybe not the entire story, but they're really the linchpin of making housing costs affordable, right? So we sort of honed in on that as a topic as it relates to ULA. And so to that end, what we tried to do that was slightly different than what Mike and Matt did is really focus in on the kinds of parcels that were most likely to be where apartments were produced. And Shane, you really had your head around a lot more issues around zoning designations and things like this. So we set out essentially to go through zoning codes in LA. I was somewhat familiar with that. But every jurisdiction has their own zoning codes. And there's some subset of zoning designations for properties that are either residential or a mix of commercial residential that have to do with this allowable density. So what we really did is go through and we identified the zoning designations in LA as well as a set of relatively larger jurisdictions in LA County, which included Burbank, unincorporated Los Angeles County, Glendale, Inglewood, Lancaster, Long Beach. Pasadena, Pomona, Santa Clarita, and Whittier. Beyond these, we found that most places had low single-digit numbers of transactions of these kinds of properties. So we got to the point where we just felt that returns were diminishing. This group of jurisdictions, though, represents about 2.6,2,700,000 people or, you know, roughly maybe two-thirds of the size of the population of the city of Los Angeles.

Shane Phillips 01:02:52
And all in the same county.

Jason Ward 01:02:53
Exactly. All in LA County, so all subject to any kind of county rules, all subject to kind of general regional costs for labor, building supplies, presumably some interest in institutional capital and things like this. And basically, we collected data on all these parcel transactions. And then what we did is we ran a model that essentially looked at the change in these kinds of parcels transacting that were above $5,000,000 before and after ULA relative to the change in these types of parcels that transacted below about, I can't remember what our I think it was $3,000,000. Yeah, $3,000,000. We tried to leave a big gap so that there wasn't any worry about price shifting down or anything. So essentially, we're comparing the change in the high value, high redevelopment potential parcels to the change in the low, lower cost, high redevelopment potential parcels. And this is where we found about a 50% decline in the transaction of these parcels, which we think are sort of the most likely transactions to indicate future building activity for multifamily housing.

Shane Phillips 01:03:55
Yeah, and this was also a difference in differences analysis, diff and diff if you're cool, had the regression models, all that fancy stuff, which was purely thanks to Jason, because I do not know how to do that. But we're going to scoot right on past those details and get to the part where we relate this to actual housing production, which was measured by building permits issued by the city. And I want to underscore the use of building permits here because projects that don't make it to that stage are often never built. Some of our friends at USC have been following this much closer than us, but I believe much more than half of units that have filed for or even received entitlements from the City Planning Department in Los Angeles since 2017 have never proceeded to construction, and enough time has passed that most never will be built, at least as they were entitled, because those entitlements have expired. I don't know whether this is unique to LA or something you see in a lot of other parts of the country. I think we're fairly unique on this. But the upshot is that any measures of housing production based on approval stages before receiving the building permit are extremely unreliable and frankly, just should not be used. Building permits are a more reliable indicator because a lot of fees are due at that stage, and so you really don't pull permits until you're truly ready to start construction. The downside to using permits for research is that it can take months or years to go from filing your project application to receiving a permit, so the data can be pretty thin when you're trying to evaluate a tax that's only been in place for a few years.

Mike Manville 01:05:27
Shane, I'm going to jump in because I want to, before you get into this part, I just want to drive home the point, on your guys' behalf, that as long as you think a development project needs a piece of property to get going, then the empirics that you guys are about to describe do become kind of like icing on the cake. To put this another way, it's like it's unequivocal in your analysis that the types of parcels that are most likely to be turned into multifamily housing saw a steep decline in their transaction. It's very hard to imagine that occurring and then seeing no effect on construction, right? And so I think the challenge that faces anyone who doesn't like your research is not just to quibble with your building permit analysis, and we can talk about that in a moment, it's to come up with conceptually, how do you end up in a world where these sorts of parcels now transact 50% less, and that doesn't show up at all in development, right? I mean, I think it's important to keep that big picture in mind.

Shane Phillips 01:06:32
Yeah. And, you know, to steel man that argument a little bit or the criticism, what you could say, because this is true, is even among these parcels that we're identifying as having high multifamily redevelopment potential, the majority are not redeveloped into multifamily or redeveloped at all in, you know, the preceding, let's say, five years. And so it's possible that all of the reduction is in those kinds of parcels that are not going to be redeveloped anyway. As you say, though, that would be strange in part because the biggest impact of the tax is on the projects that would be redeveloped. And so the tax is disproportionately disadvantaging developers. And so why would the sales disproportionately disadvantage non-developers? That's not clear, but it's not impossible. And so we wanted to back this up as much as possible.

Mike Manville 01:07:25
It's not impossible. It would be a cosmic unlikelihood. You follow a restaurant kitchen for two weeks and every time someone drops food, it lands on a plate. Like disaster averted. Not for any particular reason, that's just the way the chips fell. If that's what you want to stake your argument on, so be it, but make that argument. I think for most objective observers, if you saw that quantity of a reduction in the main input to development, even if not all of these were going to be developed, you would just expect some development to be prevented.

Shane Phillips 01:07:59
Yeah, and addressing those cosmic uncertainties is often the work of research, right? So yeah, we've found these parcels with high multifamily development potential are selling much less often. And we're guessing, reasonably so, that that will translate into less multifamily development. But guessing is often not good enough, and so we want some evidence. And that's where we get this problem with building permits being something of a lagging indicator of future production. Jason had a clever solution to this. And so I'm hoping we can explain it without confusing 90% of our listeners. You want to give that a shot, Jason? Sure.

Jason Ward 01:08:36
I think conceptually, it's not so hard, right? The idea is that people buy land and in particularly in hard to develop places like California and LA, which you know, to It's not as hard as it used to be, but a lot of projects take quite a while to go from an initial sort of aspirational purchase, or maybe even a purchase that wasn't originally necessarily fully intended to be a redevelopment project, to go to the point where building permits are issued. There are a lot of steps in between, not always, but often, right? So, first thing we did is kind of this analysis of, like, we linked building permit data from the city of LA, which has quite good building permit data relative to most other places that you can simply download from a sort of open data portal. And with a reasonable amount of effort, you can pretty well link to transactions. There are issues where sometimes parcels are combined and things like this that make linking challenging, but we were able to link quite a few transactions to future building permits. What we then did is looked at the distribution of time that it takes to go from a transaction to a building permit. We found that Roughly 60% of transactions that we could link to building permits credibly, those transactions occurred within about a year. So, we had about a year window we could sort of look forward in time for building permits and then find permits that we could link back to an original transaction date. So, if we think about the amount of time that it elapsed since ULA, what we had to do was sort of give up the final year to the present and kind of go back a year. And then we basically moved through the transaction dates with this one-year window and found all permits that we could then link back to the transaction. What this does essentially is it pulls future building permits back to a date where we think there was some intention to build typically. Right? If we can link permits that happened in the not super, super distant future, and we hold that window of looking ahead constant, then what we're getting is sort of a flow of transactions that led to building permits over time. And essentially, we simply then use the change in that number of building permits that are linked back to the transaction date, and look at that change pre and post ULA. In other words, look at the gap that occurs on average after ULA. This is not a true difference in difference. It's really more of what you may be like an interrupted time series. But given that the changes we saw in the transaction levels were so stark and so consistent, they fell and they stayed down. We felt that this was a pretty credible approach to at least get a good estimate. of what the difference in building permit volume and hence to a large degree expected units produced was. And what that led us to conclude is that the multifamily units produced per year after ULA took place fell by around 18% relative to the average in the years before ULA.

Shane Phillips 01:11:28
So yeah, after linking building permits to this subset of parcel sales, we find that Measure ULA is reducing multifamily housing production by 1900 units per year. Maybe that sounds like a lot to the listeners out there. Maybe it doesn't. But remember that multifamily permitting peaked in 2022 at less than 13,000 units. So as Jason said, we're talking about a 15 to 20% drop here. And we were already building far too little in the city. So this is making a bad housing shortage worse. We'll call that step one in this analysis. We're losing 1900 privately built unsubsidized units annually to the increased transfer tax, not counting other lost projects that aren't preceded by a sale or sales that would have led to redevelopment, but didn't meet our strict criteria for having a high redevelopment feasibility. So it's just not in our sample. Step two is about the affordable units in those projects. Nowadays in LA, nearly every multifamily development is a density bonus project of some kind, meaning they include deed-restricted affordable units for low, very low, or extremely low-income households. If we assume that 80% of units in unsubsidized multifamily projects are using the density bonus, and an average of 11% of units in those projects are affordable, then about 170 of those 1,900 units lost each year to Measure ULA are affordable units. That's step two. Step three is to compare those 170 lost affordable units to the number of affordable units Measure ULA subsidizes at the expense of these mixed income projects. The key distinction here is that we are not comparing the lost units to what the totality of Measure ULA can fund, because most sales hit by the tax are not plausibly related to multifamily development. Taxing single-family homes is generally irrelevant to multifamily production, as is taxing commercial or industrial properties, as is taxing older multifamily housing that was built decades ago. By and large, that is true. What really matters is the tax on relatively recently built multifamily projects. Because if I'm a developer considering building in LA, it's the prospect of paying the tax when I finish and sell my project that's deterring me from doing so. Or if I'm a bank, it's the prospect of foreclosing on a failed project and paying the tax when I auction it off. If I could build knowing that I'd be exempt from paying the tax on the first few sales or on any sales during the first 15 or 20 years after it's completed, then it's much less of a deterrent. So we wanted to know how much revenue Measure ULA raises from the sale of recently completed multifamily buildings in particular, and then how many affordable units could be subsidized with that pot of money. What we found is that only 8% of ULA revenues came from multifamily buildings completed in the past 15 years, less than $30,000,000 a year. Commercial and industrial properties under 15 years old make up an even smaller share of revenue, about 5%. We found the same thing when we looked at sales in the years before ULA went into effect. So we don't think that those small revenue shares were just a temporary response to the tax that would eventually recover. The $30,000,000 raised from the sale of these newer multifamily buildings is only enough to subsidize around 70 affordable units. If we make some very friendly assumptions, that might rise to as much as 140 units, which is still 30 short of the 170 lost from mixed income developments that aren't happening anymore because of Measure ULA. So at the end of all that, if we make the reasonable assumption that relieving these projects from the tax would restore their feasibility, then the result is that taxing them as we do today is not only costing us more than 1,700 market rate units annually, it's also resulting in a net 30 to 100 fewer deed-restricted affordable units. So that's step three, the final step. the 30-100 unit affordable housing deficit. I think this analysis is why our report's been attacked so strongly by certain advocates. I get the impression that a lot of them do not particularly care about market-rate housing and still take the frankly discredited view that market-rate homes don't help with affordability, but it is a lot harder to defend a policy that is unnecessarily reducing the supply of homes for low-income residents, which at least this aspect of Measure ULA seems to be doing. So that leads us to the last part of this conversation, which is lessons and recommendations, both for policymakers here in LA and California and really for anyone else looking into transfer taxes as a revenue tool, because I know there are other other states, other cities. that are considering these or even have adopted them in recent years. As I mentioned near the start of the episode, despite the criticisms, none of us I think is arguing for abolishing Measure ULA. Jason and I's analysis even shows that you can make some pretty big changes like exempting newer multifamily housing and even newer commercial and industrial and still keep the overwhelming majority of revenues. But there are a lot of directions you could go with this policy based on our research and on prior and other tax policy research. So let's talk about some of those options. Who wants to take the first swing at this?

Mike Manville 01:17:11
I can take a stab at it. I think maybe it's useful to divide this conversation into two parts. One would be if you're just in New Jersey or something and you're thinking about writing a transfer tax from scratch, what would you do? The other one is like, well, here we are in a California municipality and we already have a transfer tax. How might we fix it? And I think in the former case, it just goes back to what we were discussing earlier, which is just like, if you're doing this, because you want to raise revenue for something that you consider important, and you want to do it while causing a minimal unintended consequences, broad base, low rate, marginal rates that avoid big cliffs, What you really want is for real estate to continue to transact and all the things that flow from real estate transactions to continue to happen, but you get a stream of income that you can use for some socially beneficial good. And so I think a transfer tax bill from scratch would look quite different from Measure ULA. Whereas, you know, and I'll turn this over to you guys, because you've thought so much about it. If you're the state legislature in California, you're like, I got a fixed measure ULA. You know, it's a whole different thing, because obviously, politicians are reluctant to go into a measure that someone else approved and, you know, tear it out root and branch. I think then you just have to go for the incremental reforms that are going to preserve as many benefits as possible, but get rid of the big problem areas if you can.

Shane Phillips 01:18:34
Matt, did you have something?

Mott Smith 01:18:35
Yeah, so tying it to the issue at hand, which is Measure ULA, which by the way, is amplified by the fact that a lot of jurisdictions in California have heard about Measure ULA from a small subset of people who are singing its praises and thinking, oh, wow, we need one of those in our jurisdiction too. And so, more and more places are considering transfer taxes in that format. And people at the state level, like Assemblymember Buffy Wicks, are growing concerned. One that proliferation of transfer taxes like this might make it harder and harder for the state of California to achieve its housing objectives. And secondly, that it might, kind of like back in the 90 s and before, redevelopment agencies caused what you might call an intra-jurisdictional transfer of potential tax revenue from the states and the counties to these specific redevelopment agencies controlled by the cities. these transfer taxes are doing kind of the same thing. And the state is concerned about that.

Shane Phillips 01:19:37
And so I mean, just to underline that the redevelopment agencies were abolished in 2011, I think, in part because of this sort of backlash and concern. And so that concern of a similar outcome here is, I think, very well founded. And in light of this Howard Jarvis initiative that would abolish all transfer taxes statewide and probably blow up a few other things, is it really reflecting that?

Mott Smith 01:20:04
Yeah, yeah. No, completely. And so any reform that happens to measure ULA and to other transfer taxes should be indexed towards restoring productivity to the development market. I would say housing is a key element of that, but also commercial, industrial or manufacturing base and jobs base matter a lot as well. All of those things need to have functionality restored. And it should also fix some of the imbalances that happen when you end up with these inter-jurisdictional transfers, as Measure ULA is created. And so the proposals that are on the table to fix Measure ULA range from, as you pointed out, Shane, the Howard Jarvis, I think it's called the Taxpayer Protection Act to Save Prop 13 initiative, which is very likely to qualify for the November ballot. That would wipe out basically all transfer taxes in the state above the 0.11% statutory limit. It would do some other things, as well. It would end up costing local jurisdictions somewhere north of $3,000,000,000 a year of current revenue. It's a pretty significant move, but it would restore functionality broadly to some currently hobbled aspects of the real estate market. The other extreme of reform would be what was proposed just before the end of the 2025 legislative session in Sacramento, which was a proposal. I think it really followed your and Jason's model recommendations. It would have said that properties completed within the last 15 years, and I think the frame is new construction and it could also include substantial rehabilitation, properties completed within the last 15 years would be exempt from transfer taxes. So hopefully that would, it wouldn't cure the problem of developers looking ahead at what the impact of their exit is going to be, but it would substantially reduce the impact because the impact is 15 years out. The value of that is much smaller. And it would also, it would have also exempted people rebuilding and fire burn areas and things like that. There are some other technical fixes it would make, because Measure ULA in particular is very prescriptive about how the money is to be used, and it's so prescriptive that it's been almost impossible for this week. It's really causing some problems, yeah, to go into stacks with other funds. Indeed, yeah. They've only spent, at this point, they've only managed to place about $10,000,000 of the billion dollars into actual affordable housing projects. They've committed a bit more, but they've only actually placed 10,000,000 because of that stacking problem that Jason's talking about. The state legislation would have fixed that. So it'd be a lot easier to invest that money in affordable housing. And that's kind of the state of the art.

Jason Ward 01:22:45
Yeah, you know, I think the important part really is just to try to get it out of the way of multifamily development. But I also think that, you know, the point that I think Mike and Matt made more clearly in their paper and that I think we kind of echoed is that you really want economic activity. This gets back to this question of what do you want to discourage, right? It could be argued that we want to discourage a lot of transfers of high-value single-family homes, perhaps, even though that drives up the property tax base significantly, as we discussed, right? it sort of gets really hard to find a spot that doesn't have some somewhat undesirable characteristics. But I think limiting this to simply be truly a mansion tax is probably the most defensible point, and I think it gets to the spirit in which it was presented to voters. I think more in the weeds, there are a few other things that are worth paying attention to. First off, there's an exemption for Measure ULA. that is very, very narrowly defined. And I may be getting this not quite right. You guys are probably correct if I'm wrong, but it basically applies to established nonprofit affordable housing developers. If you're building 100% affordable housing development and you're an established nonprofit developer, you're exempt from it. There are a number of high-profile affordable housing developers that are for-profit, They produce affordable housing that is deed-restricted, long-term, that will be affordable housing just like any other unit from the perspective of a tenant. Those projects would not qualify for If ULA unless those for-profit developers partner substantially with a small number of non-profit developers.

Shane Phillips 01:24:18
Which is not, to be clear, lowering the cost of the development. If anything, that partnership is probably going to increase costs just because you're bringing more people into it. It's it's I don't know what the stats are on the like per unit cost or per square foot cost for people developing affordable housing for profit versus not for profit. But I would not be surprised if it's very similar, if for profit is at least as cost effective. And so this idea that you would create an additional obstacle for them to develop, regardless of whether they're even potentially building housing at lower price, at less need for public subsidy per unit. It's just very shortsighted and unnecessary to me.

Jason Ward 01:25:01
I agree.

Shane Phillips 01:25:02
Alright, well, last thing I want to say here is, as I said, there's been a lot of pushback against our research against us as people for even deciding to research this and having the temerity to find some negative consequences. But it's been a little baffling to me in some way, because I think the recommendations we've made are pretty limited in scope. And the really frustrating thing to me is that I don't think anyone believes that Measure ULA was a perfect initiative from the jump. It was necessarily a politically designed document that, you know, had to be written in such a way where it could get a majority of voters on board. And it accomplished that goal. But I don't think anyone thinks that it's exactly what we would have wanted if we could just adopt something by fiat. And so the visceral, like vicious defense of it at all costs against any kind of reform makes very little sense to me in that context where No one thinks this is a perfect initiative. No one would have ever made that argument. And yet to propose any kind of change is completely unacceptable. You just can't even have the conversation. And I think that's what really has stuck with me. And I think it's it's part of why. folks in the state legislature, in the city council are kind of coming around to this view, like we have to do something. And if the only alternative is no change whatsoever, well, then that's not a perspective we can compromise with or have a conversation with, really.

Mott Smith 01:26:38
Yeah, no, I was just going to say that it's really interesting, because if you talk to some of the people who are involved in getting Measure ULA passed, they'll say that some of the decisions that were made about the structure of it which have proven to be extremely consequential, like the focus on nonprofits, like the taxes focus on what might be seen as very expensive properties, a very narrow subset of the transaction set, etc. These highly consequential decisions, they would say they made for political expediency. They might say, we never could have gotten this passed had we not designed it this way, which is, of course, impossible to disprove. But one of the things they did right from their perspective is to make it basically bulletproof. So it's designed not to be changeable.

Shane Phillips 01:27:30
And I think they did this clearly to protect it from exposure to politics post passage, which is totally understandable. You don't want people raiding the fund and using it for some entirely different purpose. It's it's supposed to be spent on affordable housing. Right.

Mott Smith 01:27:45
No, exactly. But I've never seen a policy version 1.0 of which is perfect and beyond approach. And so I think that that inflexibility, which was intended to preserve measure ULA, may very well prove the source of its demise.

Jason Ward 01:28:04
Yeah, and I was just going to kind of, in a similar vein, I think that some of what we have experienced in trying to go out and disseminate these findings is just kind of reflective of the extremely polarized kind of space that we live in, and that people tend to operate in, you know, I mean, I think somewhat naively, I felt like when we got to these findings, I was going to come out and sort of say, guys, you'll never believe it. You know, this is really important. We need to fix this. And, you know, and honestly, I was just really taken aback.

Shane Phillips 01:28:36
And look at how little it would cost us to fix it. That was my feeling.

Jason Ward 01:28:40
Yeah. Yeah. It's totally fixable. And you can make this better. And I was really shocked by the extent to which it seems like people do not want to know about this. And it's unfortunate. You know, I mean, I think that Our motives have been impugned at times, and I really don't like to go into this, partially because of my professional affiliations, but partially just as a matter of personality. I don't really like to get into a lot of name-calling and so forth. People that came up with Measure ULA and promoted it and are now managing it and advocating for it, they have a lot of incentives. Some of those incentives are very much aligned with keeping things the way they are to various degrees. It would be really hopeful for me to see people take a broader focus of housing affordability and what it means to solve the housing crisis in LA. That would probably involve trying to make this policy better as we've discussed. But I think there's sort of the same kinds of polarization that characterize our politics nationally also can characterize our politics in these really micro ways about really sort of narrow issues. And I think we just see a lot of that and it's really unfortunate.

Shane Phillips 01:29:42
Yeah, yeah. All right. Well, I have kept you guys far too long. Thank you for being so generous with your time for working with us at the Lewis Center on these projects. It's been really rewarding. I know we're not done with these either. There's more research to do because this is far from a settled issue. But Jason Ward, Mott Smith, thank you again for coming on the show with us.

Mott Smith 01:30:03
My pleasure. Thanks for doing this. My favorite podcast.

Jason Ward 01:30:08
Thanks a lot Shane. Same.

Shane Phillips 01:30:14
You can find our show notes and a transcript of the episode on our website, lewis.ucla.edu. Talk with us and other listeners at uclahousingvoice.substack.com. The UCLA Lewis Center is on the socials and I'm on Bluesky and LinkedIn at @shanedphillips. Thanks for listening. We'll see you next time.