This humble South Pasadena home was on the market for just under $1.2 million and sold for over $2.5 million in hair, and when I wrote about it last month, I wasn’t surprised by the reaction.
I’ve suggested that with the crazy bidding wars in Southern California, all-cash transactions and bids well above the asking price, there should be a small stock tax on windfall gains. And I said investing this money in education, housing those who have been turned away from this market.
Not many readers paid much attention to my idea.
Someone said, “The seller of the house…already paid a ‘stock tax’…and it wasn’t small.” “It’s called federal and state capital gains taxes.”
Another reader made the same point and told me to “stop whining about income inequality,” saying that showing up at the top can do “nothing more than ambition and behaviour.”
Well, it’s a little more complicated than that, but let’s move on.
Yes, I am aware that the home seller is paying capital gains on profits, and this is a huge blow. There is also a more modest property transfer tax.
But this idea, which I’ve been pitching for several years, isn’t as far-fetched as some might think.
In Los Angeles, a coalition of housing providers and activists has handed out signatures for a proposal that could end up in the November ballot. The United to House LA initiative will impose an additional tax on property sales over $5 million and plow that revenue into preventing housing and homelessness.
In Santa Monica, Mayor Susan Himmelrich is collecting signatures on a similar proposal to fund housing and schools.
And in this state of remarkable wealth and the highest poverty rate in the country (taking into account the cost of living and housing), other cities are using what some have referred to as a luxury tax to subsidize city services.
Shane Phillips, who directs the Randall Lewis Housing Initiative at UCLA and is the author of The Affordable City: Strategies for Putting Housing Within Access (and Keeping It There).
Cities use different tax formulas and do not necessarily direct revenue to housing. In Culver City, where voters approved an additional transfer tax in 2020, the $6 million forecast in annual revenue has already been exceeded, with money earmarked for deferring street and park maintenance, after-school programs and homeless services, among other things.
Look, I’m loath to raise taxes. I also have an argument that the government should do more with what we’re already paying, especially in a high-tax state like California.
But housing equity has soared here and in many parts of the country, to the tune of trillions of dollars. Phillips said that in Los Angeles County, estimated residential and commercial real estate values are rising by an estimated $100 billion annually.
But while millions of people become millionaires, on paper, millions of working people can’t afford the average Los Angeles home price of $800,000 and pay an ever-increasing rent. There are thousands more homeless. And companies don’t help snatch homes and turn them into rentals, putting pressure on potential buyers.
If you’re one of the lucky ones whose home has become a commodity rather than a place to sleep, it’s in part because of the luck of timing and federal, state, and local government policies that favor those who can afford to buy a home over those who can’t.
You get a mortgage fee discount.
Depending on when you buy in California, Proposition 13 has kept your property taxes low while your new neighbors pay significantly more, essentially subsidizing those with artificially low taxes. Commercial real estate has enjoyed more benefit from offer 13 by using legal maneuvers to avoid revaluation at the time of sale.
Also, because a large portion of the state has been devoted to single-family homes—with homeowners widely opposed to less expensive and more dense housing—the value of a three-bedroom farm continues to rise. In the seller’s case in South Pasadena, he bought the home in 1983 for $155,000, and sold it this spring for $2.5 million.
He and the other sellers deserve their good fortune, and I’m not asking them to outgrow all the profits. I suggest that at the time of the sale, a tiny portion of their government-sponsored profits can be used in ways that help nurses, teachers, drivers, home assistants, gardeners, retail workers and others who are essential to the economy but locked into long commutes and rent increases that require bigger and bigger bites of their paycheck.
“We built Santa Monica on the backs of these people and now we simply can’t house them,” Heimmelrich said. She said that she and her husband — like her, the attorney — expect to pull about $200,000 out of their own pockets in an effort to qualify a ballot measure that would add a 5% tax on residential and commercial properties selling for $8 million or more.
Himmelrich hopes to raise $50 million annually in VAT and use the money to help with rent, homelessness prevention, affordable housing and schools.
In Culver City, the transfer tax increased from 0.45% to 1.5% on the sale of homes for $1.5 million. The tax is 3% on sales between $3 million and $10 million, and 4% on sales over this limit.
It’s easier to pass proposals that add a tax only on high-end sales, because only the wealthy get the blow. But Culver City Council member Alex Fish pushed for the $1.5 million threshold as a matter of principle. He said he wanted more people to “have skin in the game” rather than imposing a heavy tax on only the wealthiest residents.
“I feel like my constituents believe in Culver City and believe in each other,” Fish said.
Under the United to House LA initiative, the current 0.45% transfer tax will jump to 4% on property sales over $5 million, and rise to 5.5% on sales over $10 million.
Laura Raymond, one of the leaders of the coalition, told me that the tax would apply to only 3% of all sales in the city, but that it generates more than $800 million in revenue each year. The coalition says it will use the funds to build 26,000 affordable housing units within 10 years and provide housing stability for 475,000 tenants annually.
“We are creating a story of two very different cities, and now it’s time to do something really bold,” Raymond said, describing the struggles of the homeless, overburdened elderly and frustrated tenants as a humanitarian crisis.
There has been and will be growing opposition to these kinds of proposals in Santa Monica, Los Angeles, and elsewhere. A representative from the real estate industry argued in December that raising taxes on real estate transactions “sends the wrong message because it increases the already high cost of housing in the region without addressing the underlying issue — that we are still in a crisis of housing production and affordability.”
But Michael Manville, associate professor of urban planning at the University of California, has a different view.
“If your home doubles in value, it’s not because you did a killer kitchen remodel. It’s because the LA economy took off like a rocket. Did you personally launch the LA economy?” Manville said.
“Society as a whole has created this value, and there is no particular reason why a good portion of it should be disposed of while the person renting it is penalized, just because you were lucky enough to own a home while this was happening.”
This story originally appeared in the Los Angeles Times.