Fiscal Externalities of Transaction Taxes: Evidence from the Los Angeles Mansion Tax

• In Event: In Honor of Ronald C. Fisher and His Landmark Text on State and Local Public Finance: Property Value Assessment

Abstract

We estimate the fiscal externalities of a property transfer tax, the Los Angeles "Mansion Tax", on the revenues from property taxes when assessed values are closely tied to transactions. In California, as in over half of U.S. states, growth in tax assessments between transactions lags market values, so any reduction in transaction frequency reduces the growth of property tax revenue. The fiscal externality is sizable: the resulting property tax revenue loss conservatively offsets at least two-thirds of the revenue generated by the transfer tax. The net revenue loss is larger for high-value and commercial properties.

Measure ULA interacts with California’s Proposition 13, which limits growth of taxable assessed property values between property sales. Because California real estate values have grown significantly faster than Proposition 13’s two percent statutory limit on assessment growth, many properties are significantly under-assessed and the growth of the aggregate property tax base is highly sensitive to the occurrence of property transactions. Real estate transfer taxes such as Measure ULA have been shown to substantially reduce transaction frequencies and reduce the value of property sales (Best and Kleven, 2018; Kopczuk and Munroe, 2015; Slemrod et al., 2017).1 Under Proposition 13, that behavioral response widens the wedge between assessed and market values, reducing future property-tax collections. We estimate the causal impact of Measure ULA on transaction frequency, the property tax base, and revenue collection using detailed property records and exploiting spatial variation of the applicability of the ULA within Los Angeles County. Our estimates indicate that Measure
ULA reduced the transaction rate of eligible properties by 38 percent and that at least 63 percent, and potentially over 100 percent of the revenue raised by Measure ULA is offset by lower future property-tax collections.

Author

• Tejaswi Velayudhan, University of California Irvine