Can the new LA mansion tax help solve the city’s homelessness crisis?

In the heart of Los Angeles, just 10 minutes’ walk away from the ritzy hotels and financial offices downtown, there is a bustling tent city that would not look out of place in the wake of a tsunami or hurricane.

Skid Row has been a centre for LA residents without a permanent home since the first decades of the 20th century, when its location near the railway terminus made it an easy first destination for downtrodden seasonal workers and displaced Midwestern farmers during the Great Depression.

Now, with the homelessness problem in the City of Angels long having since tipped over into a crisis, the persistence of Skid Row helps explain why LA voters so enthusiastically backed a tax raid on the houses of the richest and most famous that takes effect on 1 April.

Celebrities including Jim Carrey, Britney Spears, and Kylie Jenner are reportedly scrambling to sell their multi-million-dollar mansions before a city law called Measure ULA imposes a four per cent transfer tax on property sales over $5m and a 5.5 per cent tax on sales over $10m, to be paid by the seller.

Officials estimate that the so-called “mansion tax” will raise around $672m for affordable housing, hopefully helping to get some of the city’s estimated tens of thousands of rough sleepers off the streets.

But that projection is already a substantial drop from the $1.1bn that proponents had originally hoped for, which sceptics claim is proof that the measure has backfired.

So what is Measure ULA, and will it work?

Why homelessness in LA has become a political crisis

Measure ULA – short for “United to House LA” – is the latest in a long history of attempts to tackle LA’s homelessness crisis.

In 2016, LA voters passed Proposition HHH, which allowed city officials to issue $1.2bn in new bonds to create 10,000 permanent “supportive housing” units, which combine low rents with (in theory) easy access to services such as mental health and drug addiction treatment.

Six years later, however, only 1,000 of these 10,000 units had actually been built, according to an official audit, and the average cost of each unit has spiralled from $375,000 to $600-700,000.

In 2017, nearly 70 per cent of voters in Los Angeles County – the jurisdiction surrounding the city of LA proper – backed a quarter-cent sales tax called Measure H to raise an estimated $3.5bn over the next 10 years.

As of 2022, the city’s homelessness agency had a budget of around $600m per year, which the city council raised to a whopping $1bn for the 2022-23 fiscal year.

Nevertheless, the crisis has continued to grow, with estimates in the city alone climbing from 28,000 people homeless in 2016 to 42,000 in 2022. Black people and Hispanic people are dramatically over-represented in those numbers.

“We have failed in so many respects,” LA activist Theo Henderson told The Guardian in 2022. “There are families with children living in automobiles. There are elderly and the infirm on the streets … It’s a dark time right now, and unhoused residents are very afraid.”

There is now immense political pressure to fix the crisis from all across the society, from homeowners who fear that homelessness in their area will lead to higher crime to those who are simply morally outraged by the suffering they see every day on their commute.

How would Measure ULA address the problem?

While the reasons for becoming homeless are complex and extremely varied between individuals, activists and experts say the biggest single factor is the simplest.

“Lack of affordable housing” was the most common answer in a nationwide survey by the US Conference of Mayors, followed up by “unemployment”, “poverty”, and then “low wages” for families or “mental illness and the lack of needed services” for single adults.

LA’s homelessness agency has likewise blamed the crisis on stagnant real incomes, rising house prices, lack of investment in mental health services, lack of tenant protections, discriminatory land use, and the long shadow of America’s sprawling prison system.

According to the non-profit LA Family Housing, in 2020 an LA renter needed to earn 2.8 times the California minimum wage in order to afford the average two-bedroom apartment in Los Angeles County.

At the root of this is California’s longstanding housing crisis, driven by spiralling property prices in the state’s biggest cities while the supply of new, cheaper housing is often restricted by zoning laws or existing residents who want to preserve the character of their neighbourhoods.

Research by real estate professor Gregg Colburn and data journalist Clayton Page Aldern found that high rental costs and vacancy rates were “by far the biggest predictor” of homelessness per 1,000 people, outstripping other problems such as poverty or addiction rates.

“We’re not trying to dispute that these [other] individual vulnerabilities matter,” said Mr Colburn in 2022. “They certainly do. But the point is, there are people who are addicted and mentally ill in Chicago, and Chicago has one-fifth the homelessness of Seattle and San Francisco. So what’s going on here?

“The point is these individual vulnerabilities interact with housing markets to produce homelessness…. you could fix all the addiction in San Diego right now and you’d still have a problem with homelessness because there just aren’t places for people to go who have lower levels of income.”

Hence Measure ULA, which aims to greatly increase the supply of cheap housing in Los Angeles.

What impact has it had so far?

Measure ULA was opposed by LA’s real estate industry, which claimed that it would punish an industry that was “already struggling” due to a cooling property market, high interest rates, and high inflation.

Some claimed that the new taxes would be passed on to tenants by their landlords, meaning higher rents, while others said that many people who should not be considered rich own houses worth more than $5m because of how much LA’s property values have risen over the past few decades.

“If you were dealing with the people who were $50 million or $20 million or $30 million, fine, anyone that can afford a $20 million house is very, very rich,” realtor Juliette Hohnen told The Hollywood Reporter. “But over $5 million? It’s rich but in Los Angeles it’s not, given how much everything costs.”

The long-term impact remains to be seen, but it already appears to be causing feverish activity in the real estate market as the deadline ticks nearer. “It’s created a bit of a frenzy, with people trying to beat the April 1 date, and lots of opportunities for buyers looking for value,” real estate broker Tyrone McKillen told The New York Times.

“I’m seeing deals get done that should never have gotten done,” broker Josh Altman told The Telegraph, while another told CNBC the measure had led to “dramatic price reductions on many homes”.

Some owners, The LA Times reports, are considering creative schemes to reduce their tax liability such as dividing a single property into multiple properties, each one of which would fall below the $5m boundary.

One LA real estate agency offered a $1m bonus on top ordinary commission for any agent who could close a sale for a $28m, seven-bedroom Bel Air pad (which reportedly belongs to celebrity plastic surgeon Paul Nassif) before 1 April.

Another said: “Due to the upcoming ULA tax starting 1 April, get a $400k deduction from seller if you close escrow by 31 March.”

But surely the strangest was a listing for a $16.5m home on Mullholland Drive, which literally offered a free car.

“INCREDIBLE LIMITED TIME BUYER OFFER,” it said. “This is your chance to receive a brand new 2023 luxury vehicle of your choice from the Aston Martin Vantage, Aston Martin DBX 707, McLaren GT or Bentley Bentayga EWB, when you purchase this luxury property at $16,495,000 and successfully close escrow before April 1, 2023.”