It’s a well-established tradition at all levels of government that when the traditional sources of revenue dry up, government officials tend to come up with increasingly hare-brained alternatives. As cities continue to seek new ways to replace lost revenue in the wake of the urban flight that took place during the pandemic, we’re seeing that trend play out — one growing example of this is so-called “mansion taxes.”
“Mansion taxes” at first glance appear well-targeted at the wealthiest taxpayers that are most able to pay more (after all, if you own a mansion you’re probably wealthy!). These taxes, which generally apply to sales of residential property above a certain threshold of value, have been implemented in Los Angeles, approved recently in a Santa Fe ballot measure, and are being considered in Chicago. All of these cities are justifying these taxes as anti-homelessness and pro-equity solutions, but they are likely to have the opposite effect.
The biggest issue with these proposals is that they also apply to new multifamily development projects. Purchasing property to build a new apartment complex, for example, is likely to incur the “mansion tax,” strongly disincentivizing such projects in cities that have such taxes even as housing costs continue to rise.
In Los Angeles, for example, which has already implemented such a tax, new multifamily and commercial building construction has completely ground to a halt in the wake of the implementation of the city’s “mansion tax.” This artificial constraint on housing supply at the same time as demand remains unchanged means that prices of both new housing purchases as well as cost of apartment rentals increases.
A blind spot that progressives often have when it comes to housing policy is that luxury housing frees up supply of more affordable housing. Wealthy people who are disincentivized from building or buying luxury housing don’t always throw up their hands and leave — sometimes they just buy slightly less luxurious housing that falls under the threshold of the “mansion” tax. This in turn pushes everyone else down the ladder, to the point where low-income residents are unable to afford housing.
A final point is that a lot of these “mansion taxes” set the threshold for a “mansion” at $1 million. City living is expensive, and a $1 million residence is often not a mansion in many cities, even setting aside the above point about multifamily developments. The value of the median home sold in Los Angeles in September of 2023, for example, is $983,000 — in other words, not a mansion, just an average residence. Housing is less expensive in Chicago and Santa Fe, but one need not purchase a villa in these cities to become subjected to “mansion taxes.”
Cities following in these “mansion tax” footsteps in the name of affordable housing are likely only contributing to the problem. Better solutions include reforms that streamline and encourage new housing development that addresses the problem of housing unaffordability by increasing supply, not taxing it.
Americans around the country are facing an increasingly unaffordable housing market. Local policymakers are doing them no favors with well-intentioned but poorly-considered “solutions” that only contribute to the problem.
