A Bad Decision for the Rule of Law
The City of Los Angeles's "Mansion Tax" Imposed by 2022's Measure ULA Violates the California Constitution
Last Tuesday, a Superior Court judge dismissed a lawsuit against the City of Los Angeles’s Measure ULA, known colloquially as the “Mansion Tax”, which voters passed in November 2022.1 This decision is incorrect and should be reversed.2
What is the “Mansion Tax” imposed by Measure ULA?
Measure ULA charges a sales tax of 4% on the sales of all real property sold in Los Angeles for 5 to 10 million and a sales tax of 5.5% on the sales of all real property sold in Los Angeles for over 10 million.3 The name of “Mansion Tax” is a misnomer since it applies to all real property, not just mansions. The proceeds of the tax are for funding homeless housing and providing additional services to the homeless.4
Why is Measure ULA unconstitutional?
It violates the plain language of the California Constitution, as enacted by both Proposition 13 (1978) and Proposition 218 (1996).
In 1978, Californians passed Proposition 13, the infamous constitutional provision that limits property taxes.5 Proposition 13 limits annual property tax increases to just 1% a year and sets the value of what can be taxed to the most recent purchase price of the property.6 Proposition 13 set out a comprehensive scheme of interlocking tax reforms that limit taxation by both state and local government.7
Among many other things, Proposition 13 enacted Section 4 of Article XIII A of the California Constitution, which provides:
“Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.”8
Although not defined in the Constitution, the California Supreme Court has held that an “ad valorem tax [on real property] . . . is any source of revenue derived from applying a property tax rate to the assessed value of property.”9 This provision was designed to prevent local governments from finding ways to recoup losses from the property taxes by implementing creative new taxes.10
Proposition 13 applied this same restriction on the imposition of new ad valorem taxes on real property and transaction or sales taxes on the sale of real property to the State Legislature.11 While the State Legislature can pass new taxes, subject to a two-thirds vote of both houses, it cannot introduce any new ad valorem taxes on real property or sales or transaction taxes on the sale of real property.12
While Measure ULA is called a “transfer tax”, its name is meaningless as to what kind of tax it actually is.13 Measure ULA is a sales or transaction tax on the sale of real property. A taxpayer only pays it upon the sale of real property. Moreover, the amount of the tax, like a sales tax, is determined by the amount that a price is sold for.
So why did Measure ULA even get on the ballot in the first place and why is the question of whether it is allowed even being debated in the courts? It appears to stem from confusion caused by a casual reading of past case law and ignoring subsequent changes to the California Constitution.
Notwithstanding these explicit constitutional bans on sales or transaction taxes on the sale of real property, two appellate courts previously upheld so-called “transfer taxes” based on the sale of real property in the early 1990’s.14 Now, I do not think these opinions were correctly decided. However, as these cases have never been directly overruled or de-published, they still must be followed.15
With one key exception.
Those cases are good law and must be followed to the extent that they interpreted constitutional law as it existed at the time of the decision.16 However, reading both these cases closely and the current constitutional language, these cases are not actually controlling as to whether Measure ULA is constitutional.
In order to understand why, one needs to understand the basic set up of constitutional taxation rules in California.
In California, all taxes are classified as either general taxes or special taxes.17
What’s the main difference?
A “general tax” is “any tax imposed for general governmental purposes.”18 At the local level, general taxes cannot be passed until submitted to the electorate and approved with a simple majority vote.19
A “special tax” is “any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund.”20 At the local level, special taxes cannot be passed until submitted to the electorate and approved, with one exception, by a two-thirds majority vote.21
Initially, Proposition 13 did not define the difference between a general tax and a special tax, leading to much litigation over whether taxes constituted a special tax.22 Proposition 13 also did not define what constituted a “special district” with much litigation over whether local government agencies were subject to the two-thirds rule to impose special taxes.23 There was also litigation over whether counties and cities had set up proxy-agencies in order to get around the restriction.24
The litigation over these issues is unsurprising. If a local tax was considered a special tax, it required a two-thirds vote of the electorate to pass.25 However, if a local tax was not considered a special tax, a two-thirds majority vote of the electorate was not needed.26 Additionally, as courts narrowly construed when Section 4 of Article XIII A applied, local governments had incentive to find creative new ways to impose taxes.27
It is under this confusing and fractured legal framework that the courts considered the constitutionality of transfer taxes on the sale of real property.
In upholding local transfer taxes on real property, the appellate courts held that these transfer taxes were permissible because they constituted general taxes, not special taxes.28 In both cases, the courts reasoned that the transfer taxes constituted general taxes because the money raised by them was placed into the local general fund.29
Why does that matter?
While Section 4 of Article XIII A of the California Constitution absolutely prohibits the imposition of “a transaction tax or sales tax on the sale of real property”, dicta from a 1986 California Supreme Court decision suggested that the clause only applied to special taxes.30
Relying upon this dicta, the appellate courts reasoned that the restriction against imposing new ad valorem and sales or transaction taxes only applied to the imposition of special taxes, not the imposition of general taxes.31
The key takeaway from both of these cases is not that transfer taxes on the sale of real property are permissible in all cases, but rather that transfer taxes on the sale of real property are permissible only if they are held to be general taxes.
In 1996, subsequent to these two cases and multiple other court decisions that were widely disliked by the public, California voters passed Proposition 218.32 Proposition 218 reversed a number of California Supreme Court and California Court of Appeals decisions that had allowed for ways around property tax limitations.33
In 2010, after further litigation, California voters passed Proposition 26, which finally defined what a tax was under the law.34 The California Constitution now makes clear that where money goes is irrelevant to determining whether a tax constitutes a special tax.35 The government now bears the burden of proving that a fee is not a tax.36
Measure ULA is a special tax because it raises money for a specific purpose - funding homelessness housing and homelessness services. The City of Los Angeles does not argue otherwise, conceding that it is a special tax. The city’s main defense is that Measure ULA only requires a majority vote instead of a two-thirds majority vote for passage, citing dicta from a 2017 California Supreme Court case.37
But even assuming, for the sake of argument, that the city is legally correct that only a majority vote was needed to pass Measure ULA as a special tax, the absolute ban on imposing a sales or transaction tax on the sale of real property still applies. It is still a special tax and even a special tax receiving a two-thirds majority vote cannot impose a sales or transaction tax on the sale of real property.38
Thus, under the two previous decisions upholding transfer taxes on the sale of real property, Measure ULA is unconstitutional as it is now considered a special tax, subject to an absolute ban on sales or transaction taxes on the sale of real property.
Some may be confused. How can a court decision interpreting the Constitution be overturned?
Technically, the voters do not overturn an actual decision of the Court. That decision remains the interpretation of the then-existing language of the Constitution. What changes though is the language of the Constitution itself.39 The best explanation is as follows:
Although the people through the initiative power may not change this court's interpretation of language in the state Constitution, they may change the constitutional language itself, and thereby enlarge or reduce the personal rights that the state Constitution as so amended will thereafter guarantee and protect. The difference between interpretation and alteration is the difference between the judicial and legislative powers. Interpretation of existing statutory and constitutional provisions is a fundamental power of the judicial branch, while alteration of existing statutory and constitutional provisions—by addition, deletion, or modification—is a fundamental legislative power that the people may exercise through the initiative process.40
This may seem counterintuitive or even unprecedented. However, plenty of notable examples exist where voters overrode the courts. A few that come to mind:
- Providing Non-English Speaking Criminal Defendants With an Interpreter
The California Court of Appeals had held that constitutionally, an interpreter for a non-English speaking criminal defendant was only required in cases of necessity and the decision was up to a judge’s discretion.41
A subsequent constitutional amendment to the California Constitution subsequently reversed those rulings, requiring an interpreter in all cases.42
- Making Reasonable Accommodations for an Employee’s Religious Practices
The California Court of Appeals had held it was perfectly constitutional for the government to fire an employee, who, as a Seventh Day Adventist, refused to work on Saturdays as it was his Saturday Sabbath.43
A subsequent constitutional amendment changed the language of the California Constitution to directly prohibit employment discrimination on the basis of religion, and the Constitution now requires an accommodation for Seventh Day Adventist employees who refuse to work a Saturday Sabbath.44
- The Government Seizing Private Property Through Eminent Domain and Later Giving it to Other Private Parties
The United States Supreme Court had held this practice was constitutional under the United States Constitution’s provisions restricting eminent domain.45 The California courts had also reached the same conclusion interpreting the California Constitution’s similar provisions restricting eminent domain.46
A subsequent constitutional amendment changed the California Constitution to prohibit that practice.47 Whatever past court decisions on the topic, the California Constitution is now clear that the government may not take private property from one and give it to another private party.48
Voters can also incorporate court decisions they like into the California Constitution to ensure that later courts cannot overrule these decisions. This is especially important in the area of individual rights. A key example comes to mind.
In 1969, the California Supreme Court held that an inferred and implicit right to privacy in the Constitution protected the right of a woman to seek an abortion.49 In November 1972, California voters directly codified that ruling into the California Constitution.50 That is why women in California have far greater protected abortion rights today than Roe v. Wade ever provided.51
Thus, the voters always have the final say to either (1) change the Constitution if they dislike what the courts have decided and want a different outcome or (2) agree with the courts and decide to expressly incorporate the decision into the Constitution.52
In that regard, additional constitutional changes by Proposition 218 prohibit Measure ULA if the original language of Proposition 13 was in any way unclear. The California Constitution now specifically provides:
“No tax, assessment, fee, or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except . . . . Any special tax receiving a two-thirds vote pursuant to Section 4 of Article XIII A.”53
An “agency” includes “any county, city, city and county, including a charter city or county, any special district, or any other local or regional governmental entity.”54
A transfer tax on the sale of property is a tax upon a person as an incident of property ownership, not a fee.55 This language containing the absolute ban on special taxes on real property without a two-thirds vote makes clear that this applies to special taxes imposed through citizen initiatives.56
Thus, the California Constitution is clear that sales and transaction taxes on the sale of real property may not be enacted. Measure ULA, which does just that, is unconstitutional.
Many ardently defend Measure ULA because of the current homelessness crisis in Los Angeles. There is a desperate need for more money to build housing for the homeless and provide treatment services. The government doesn’t have nearly enough money to house the homeless and help them off their feet.
Millionaires and billionaires able to afford mansions in LA, on the other hand, have a good deal of money. Taxing the sales of their property purchases would provide that much needed money.
Therefore, it is acceptable to some to ignore the language in the Constitution prohibiting it and coming up with alternative readings of the Constitution in order to keep Measure ULA as the law. It’s highly convenient to ignore the Constitution when it comes to solving a major problem faced by the public and the policy in question is ultimately for a noble cause.
But this is a seductively dangerous path to follow.
Whenever courts disregard the Constitution to apply their own policy choices, they not only lose their credibility but set a dangerous precedent where other individual liberties can be jettisoned at a whim.
If a court can ignore constitutional language on taxation, a court can just as easily ignore constitutional language on other key issues including, though certainly not limited to, abortion, sexual privacy, free speech, free exercise of religion, and criminal defense protections.
Why?
Because the court would decide that ignoring the Constitution is simply good for society and fits with their personal sense of morality. If the precedent has been set to disregard the taxation provisions, there is precedent to ignore the law in those other cases. If judges are free to disregard the law as they see fit, then there is no rule of law.
The courts in California have generally been good about not ignoring constitutional language in order to pursue their preferred personal policy agendas.57 Courts understand the inherent limitation of their powers and the importance of respecting the will of the voters.58
The philosophy that guides most judges in interpreting the California Constitution is: “I am bound to the law as I find it to be and not as I might fervently wish it to be.”59
Hopefully, the California courts will continue to adhere to this standard. Measure ULA should be struck down as unconstitutional. Doing otherwise would be harmful to the rule of law.
https://www.bisnow.com/los-angeles/news/commercial-real-estate/measure-ula-legal-challenge-dismissed-la-superior-court-121339
The author of this article is an attorney licensed to practice in the State of California and the District of Columbia. This article and all of the works on this Substack page are statements of the opinions of the author, only, and do not constitute legal advice; they are not intended to be relied upon by any individual or entity in any transaction, past, pending, or future. A paid subscription to this Substack page supports the author's scholarship and provides access to research that the author has compiled, but does not establish an attorney-client relationship. The author does not accept unsolicited requests for legal advice or representation, and this Substack page is not intended as legal advertising. The opinions expressed on this Substack page reflect the personal views of the author only.