A rare California Supreme Court move shelters LA’s Mansion Tax

In this installment of our series discussing key topics of interest for general counsel (GCs) in California, we analyze how a rare California Supreme Court decision to remove a ballot measure from this year’s election derailed an effort to repeal the Mansion Tax.

The Mansion Tax, formally known as Measure ULA, imposes a special transfer tax (the ULA Tax) on residential and commercial real estate valued at more than $5 million. Since it took effect in Los Angeles on April 1, 2023, the Mansion Tax caused lots of uncertainty, including how property values are determined in the context of portfolio sales and whether the tax applies to transfers of interests in entities that own property in the city. Despite its moniker, the Mansion Tax affects apartment buildings and other commercial real estate transactions and added an additional cost concern for investors, lenders, and developers to be wary of. Though the full effects still remain to be seen, the practical implication of Measure ULA is that it increases the taxes on transfers of real estate in the City of Los Angeles. In attempts to avoid these tax implications, creative lawyers brainstormed ways to structure deals, such as selling divided interests in entities that own an asset instead of selling the entire fee interest to one buyer. But these plans remained in a state of limbo amidst legal disputes.

Measure ULA has faced numerous court challenges where parties argued that it was a form of a prohibited “special tax” that violated both the state and federal constitutions, among other local laws. See Howard Jarvis Taxpayers Association v. City of Los Angeles (Cal. Super. Ct. October 24, 2023) No. 21STCV20310 (court dismissed Plaintiff’s claims and held that the constitutional challenges raised did not apply to citizens’ initiative power to raise special taxes by a majority vote); Newcastle Courtyards, LLC v. City of Los Angeles (9th Cir. Jan. 6, 2023) No. 2:2023cv00104 (Plaintiffs appealed district court’s dismissal and rejection of challenges to ULA on the grounds that it infringed upon the U.S. Constitution’s Equal Protection Clause).

Ultimately, the Mansion Tax has managed to withstand several failed challenges, including the latest ruling by the California Supreme Court in Legislature of the State of California v. Weber (Hiltachk) (Cal. 2024) 549 P.3d 884.

On June 20, 2024, the California Supreme Court removed a ballot measure – the Taxpayer Protection and Government Accountability Act (TPA) – from the November 2024 ballot. The unanimous decision came after Gov. Gavin Newsom and the state legislature petitioned the Court in September 2023 to intervene and disqualify the measure from the ballot.

The TPA would have broadened the definition of the term “tax” and required any state and local tax increases to be approved by both a two-thirds vote in the Legislature and a majority of voters. In effect, this would have made it harder to increase taxes in California. Notably, the measure would have also retroactively applied to tax increases that were approved after Jan. 1, 2022, meaning that certain taxes, like the infamous Mansion Tax, which passed with 57.77% voter support, would have been void under the TPA.

With the fast-approaching election cycle, the California State Legislature, Gov. Newsom, and elector and former Senate President Pro Tempore John Burton filed an emergency petition for a writ of mandate to bar the Secretary of State from placing the TPA on the November 2024 ballot. The petition argued that the TPA was invalid because it would transform the Legislature’s power to levy taxes and “impair essential government functions.” Hiltachk, supra, at 9–10, 24–25.

Because June 27, 2024 was the deadline for the Secretary of State to formally qualify the TPA for the Nov. 5, 2024 General Election ballot, the California Supreme Court expedited the decision. The Court acknowledged the novelty of its action, admitting that the Court “typically review[s] constitutional challenges to an initiative after an election in order to avoid disrupting the electoral process and the exercise of the franchise.” Id. at 10 (emphasis added) (citing Brosnahan v. Eu (1982) 31 Cal. 3d 1, 4). However, the Court explained that its preelection review was justified when the challenged proposed initiatives could possibly result in unlawful revisions to the California Constitution. Id. at 13.

Key to the Court’s decision was the distinction between an amendment to the California Constitution, which proposes “changes specific and limited in nature,” and a revision, which “makes ‘far reaching changes in the nature of our basic governmental plan.’” Id. at 18, 21 (emphasis in original) (citations omitted). While measures that amend the California Constitution may be submitted directly to a vote of the people, revisions to the Constitution can be proposed only by a constitutional convention. Id. at 16–17. The Court concluded “that the TPA would amount to an invalid constitutional revision based on its far-reaching changes to existing processes by which revenue measures are enacted and maintained at the state and local levels.” Id. at 12. The Court thus took “the dramatic step of ordering the removal of [the] measure.” Id. at 13.

The practical implication of the Court’s unanimous decision is that the TPA will not be voted upon this election cycle. But the TPA could come back in another form – a constitutional convention. Until then, California GCs and others are left without immediate relief from recent tax initiatives, including the Mansion Tax, which many hoped would be void with the passage of the TPA.

Without recourse in the courts, including the recent fallout from the Supreme Court’s decision on the TPA, California GCs are cautioned to pay particular attention to recent guidance from the City of Los Angeles Director of Finance, which outlines exemptions that apply and lists the updated ULA thresholds for transactions closing after June 30, 2024. See Real Property Transfer Tax and Measure ULA FAQ, Los Angeles Office of Finance, https://finance.lacity.gov/faq/measure-ula (last visited July 9, 2024). GCs should keep these tax considerations in mind as they continue to navigate the real estate market and the rest of the election year because, for now, the Mansion Tax is here to stay.