New Transfer Tax Certified as Approved by Los Angeles Despite Receiving Less Than 2/3 Vote
Those with real estate holdings in the City of Los Angeles should be aware of this new looming tax increase on sales or transfers of real property, which is estimated to cost taxpayers between $600 million to $1.1 billion annually.
On December 5, 2022, the Los Angeles County Registrar-Recorder/County Clerk announced that it certified the final results for the November 2022 General election. One of the tax measures on the ballot for voters in Los Angeles was Measure ULA, which proposed an additional documentary transfer tax on sales or transfers of real property over $5 million within the city. The certified final results showed that Measure ULA Passed with 57.77 percent of voters in favor of the new tax.
Measure ULA imposes a new 4 percent transfer tax on sales or transfers of real property valued at over $5 million but less than $10 million and a 5.5 percent transfer tax on sales or transfers of real property valued at over $10 million. The new transfer tax goes into effect for sales or transfers occurring on or after April 1, 2023, and could adversely affect sales or transfers of commercial and residential property within the city of Los Angeles.
Although Measure ULA is a special tax that designates the new tax revenue to “affordable housing programs and resources for tenants at risk of homelessness,” the City of Los Angeles only required a simple majority vote for the measure’s passage. Historically, local special tax increases were required to obtain greater than two-thirds voter approval in order to pass under California Constitution, Article XIII C. Article XIII C, section 2 states, “No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote. A special tax shall not be deemed to have been increased if it is imposed at a rate not higher than the maximum rate so approved.” However, due to recent court decisions spurred by the California Supreme Court’s opinion in California Cannabis Coalition v. City of Upland (2017) 3 Cal.5th 924, localities have begun to require only a simple majority to pass special tax increases put on the ballot by its citizens. The Upland decision has created this “loophole” allowing local special tax measures to pass with a simple majority because it stated that local government does not include the electorate and that voters did not limit their power to raise taxes by initiative through Article XIII C.
The Upland decision came out in 2017, and by 2018 local jurisdictions like San Francisco had taken the position that special tax increases put on the ballot by citizens only required a simple majority vote, as was foreseen by the dissenting justices in the Upland ruling. Taxpayers challenged the validity of special tax measures in San Francisco and other jurisdictions that had passed by a simple majority, but the California courts of appeal upheld the use of the simple majority vote threshold in decisions such as City and County of San Francisco v. All Persons Interested in Matter of Proposition C (2020) 51 Cal.App.5th 703, City and County of San Francisco v. All Persons Interested in the Matter of Proposition G (2021) 66 Cal.App.5th 1058, and Jobs & Housing Coalition v. City of Oakland (2021) 73 Cal.App.5th 505, among others. Although many decisions were appealed all the way to the California Supreme Court, it declined to hear any of these cases. Without a new court decision or a change in law, taxpayers should expect to see a wave of local special tax increases passed by a simple majority vote.
Yet, for those who believe the courts have misinterpreted the Constitution, there may be a chance for redress in the form of a potential November 2024 ballot measure. The Taxpayer Protection Act, which has already gathered signatures in an attempt to qualify for the 2024 general election, would amend the California Constitution to clarify that all special taxes, regardless of the initiative’s proponent, require two-thirds voter approval. Originally slated to be on the November 2022 ballot, the proponents of the measure decided to hold off until 2024. A key provision in the Taxpayer Protection Act provides that any tax measure approved between January 1, 2022, and the Taxpayer Protection Act’s effective date would be nullified unless it comports to the new law. Thus, there is a possibility that if the Taxpayer Protection Act passes in 2024, Measure ULA would be invalidated as it obtained approval from less than two-thirds of voters.
If the Taxpayer Protection Act is approved, it would follow the history of voters reaffirming the supermajority vote threshold for special tax increases through initiatives, including Proposition 218 (1996) and Proposition 26 (2010), after the courts had weakened voter protections enacted by Proposition 13 (1978).
If you have questions about Measure ULA or need assistance with this or any other tax matter, please get in touch today with our dedicated team of attorneys at Bewley, Lassleben & Miller, LLP.