In recent years, and with the best of intentions, several California jurisdictions have passed real estate transfer tax measures that they hoped would increase revenues and help fund affordable housing.

But Los Angeles’s Measure ULA, San Francisco’s Proposition I, and Santa Monica’s Measure GS have flipped that old saying on its head: The best intentions can accidentally lead to unpaved roads. The taxes have cratered housing production, and in some cases even led to lower revenues than the status quo.

More concerningly, these poorly designed transfer taxes have given rise to a growing anti-tax backlash, led by the Howard Jarvis Taxpayer’s Association — the same group that brought us the infamous Proposition 13 — that has qualified a measure for the November ballot. The “Local Taxpayer Protection Act” would not only throw out the problematic transfer taxes, but it would also dramatically raise the threshold for voters to approve new sources of funding. That would severely hamper the ability of local governments to raise revenues for vital services like housing, roads, schools and fire protection.

Unless the Legislature and governor act soon, the confusing ballot measure could end up hamstringing the finances of every jurisdiction in the state.

Local Tax Measures Are Cutting Into Home Building

First, the facts: The tax measures passed by Los Angeles, Santa Monica, and San Francisco are reducing home building.

Alongside bonds and sales taxes, some cities partly rely on real estate transfer taxes, fees charged to a seller when a property changes hands. Set as a percentage of the sale, these taxes are usually calibrated to generate meaningful revenue without discouraging sales. Counties and other general law cities are prohibited from charging more than a 0.11% transfer tax.

But in the cases of ULA, Prop. I, and Measure GS, cities experimented with much higher transfer taxes, often marketed as “mansion taxes” because in theory, they would apply to very expensive homes. In practice, these levies fall overwhelmingly on large commercial and multifamily transactions, not single-family homes.

The results speak for themselves.

Dramatic Reduction in New LA Apartments

In Los Angeles, the rate for Measure ULA was set too high, and has stalled residential sales as well as urgently-needed new construction. L.A.’s tax applies in full to all transactions above $5 million, creating a sharp “cliff” rather than a gradual, marginal rate. In other words, a luxury home that sells for $4.9 million pays $0 in ULA taxes, but an affordable 8-unit apartment building could pay over $200,000 in transfer taxes.

The result? A dramatic reduction in new apartments, and an equally dramatic crash in turnover of the kinds of properties most likely to become new housing.

A recent UCLA analysis suggested ULA may now be costing the city and county more in lost property taxes than it collects from the transfer tax itself. Transfer taxes are one-time fees that only apply at the point of sale, unlike property taxes, which generate a stream of public revenue each year.

In effect, some cities are robbing counties, school districts, fire protection areas and other taxing authorities by keeping 100% of transfer taxes, while denying everyone else property tax revenue.

Santa Monica’s Measure GS produced similar effects. Its rate of $56 per $1,000 on sales of $8 million and above is among the highest in the state. In the year after it took effect, residential sales above that threshold were cut in half, and commercial sales fell from 18 to 5. The measure raised well under half of the projected revenue.

San Francisco’s Prop. I, which taxes up to 6% on the largest transactions, has stunted housing production and sales so significantly that city leadership is now pursuing an effort to cut the tax in half. When the officials closest to a measure move to revise it, the lesson is worth taking seriously.

Back to Two-Thirds Majority to Raise Taxes?

The measure now on the November ballot would partially fix this problem by limiting transfer taxes to 0.11% statewide. But it would create a more significant problem by raising the threshold for voter-approved taxes from a simple majority to two-thirds — threatening local government finances across California and compromising funding for schools, roads, housing and public safety.

This outcome is avoidable, but the window is short. The governor and the Legislature have until June 25 to strike a deal that would prompt proponents to pull the measure from the ballot.

The specifics remain to be worked out, but a workable framework is within reach — and all the stakeholders are at the table. It would correct the well-intended but poorly executed taxes passed in a handful of cities. More importantly, it would help prevent a wipeout in housing production, a goal that state leaders agree needs to be our lodestar.

The Legislature and the governor should reach that agreement, and remind themselves that while good intentions are nice, roads are still paved with tax dollars.

About the Author

Brian Hanlon is the co-founder and CEO of California YIMBY.

This article was originally published on CalMatters and was republished under the Creative Commons Attribution-NonCommercial-NoDerivatives license.