Real estate tax-cut proposal pulled from ballot in last-minute deal

A controversial tax-chopping ballot measure was pulled from California’s November ballot in a last-minute compromise that left many legislative Democrats feeling put out. 

The sudden change of electoral fortunes came after a week of frantic backroom haggling by the Gov. Gavin Newsom’s office, state legislative leaders, housing advocates, unions and business interests to convince the proposition’s sponsor to withdraw it before Thursday’s deadline.

The now-abandoned proposition to cap real estate taxes and make it harder for local governments to raise other revenues was sponsored by the Howard Jarvis Taxpayers Association, a longstanding anti-tax advocacy group.

In exchange for pulling the measure, the governor’s office and legislative leaders agreed to put a different constitutional amendment on the ballot that would raise the share of votes needed to pass certain local taxes. 

Democrats also agreed to remove another constitutional amendment from the ballot that would have made certain tax-limiting measures much harder to pass.

Jon Coupal, president of the taxpayers association, said he was as surprised as anyone by the 11th-hour outcome after putting out a statement hours earlier declaring the negotiations dead and vowing to take the original measure to the ballot even as members of his own coalition were turning against him.

But after days at an impasse, Newsom’s office “put something on the table that is pretty pleasing to us,” he said. “Which surprises me.”

A spokesperson from the governor’s office said the deal will free cities and other jurisdictions focus on priorities instead of cuts.

“With the (Jarvis measure) off the ballot, cities and counties can keep delivering the services Californians count on — from keeping teachers in classrooms and ensuring strong fire and emergency response, to providing health care for children and families,” spokesperson Tara Gallegos said.

California election law gave ballot measure sponsors until 5 p.m. on Thursday to voluntarily withdraw their measures. The outline of the new deal only emerged in the early afternoon. That gave the Legislature scant time to consider the grand bargain, discuss it in conference and then ram the changes through. 

“Politics is about choices, and we often must navigate challenging decisions,” said Assemblymember Buffy Wicks, an Oakland Democrat who introduced one of the compromise bills. “Big picture: the vote today protects vital resources for our local communities and it removes the greatest threat to our cities and their fiscal health.”

The deal gave Republicans a rare opportunity to celebrate in California’s Capitol. “This is a huge win for every Californian,” Bakersfield Sen. Shannon Grove said in a statement.

Why Democrats made a deal

The proposition was the kind of fiscal one-two punch to keep Democrats, local governments and other left-of-center interest groups up at night. 

First, it would have limited local transfer taxes — fees on the sale of real estate — to no more than 0.055% (fifty-five cents for every $1,000 in a property’s value). Twenty-six cities, including some of the state’s largest, have levies set well above that cutoff, with Los Angeles’ mansion tax, which funds affordable housing and renter assistance, maxing out at 100 times that rate.

The proposition would have also raised the share of votes needed for certain types of local taxes. Though many local tax measures in California require the support of two-thirds of voters, those placed on the ballot through signature gathering campaigns to fund specific purposes only need more than 50%. The Jarvis proposition would have nixed that rule and voided any measures enacted since 2017 that didn’t meet the two-thirds requirement.

Instead, under Thursday’s deal, voters will consider the 50% rule on local tax measures alone, though it would not apply retroactively.

Though public polling suggested that Howard Jarvis’s proposition faced long odds in California, lawmakers, unions and other opponents worried that voters could be persuaded to back an anti-tax measure amid heightened concerns about affordability and the cost of living. The double-barrelled tax cut would have blown a multibillion-dollar hole in municipal budgets annually, but would have saved local taxpayers just as much, according to an estimate by the nonpartisan Legislative Analyst’s Office. 

Cities aren’t enthusiastic about the new deal, which would give voters a chance to cut off what has become a frequently used funding source for public programs. 

“At a time when cities are already struggling to maintain a high quality of service in a context of high inflation, runaway costs for basic goods and services, cuts in federal funding, and stagnant sales revenue, efforts that limit the ability to raise local revenues only deepen uncertainty for local governments and the communities they serve,” Carolyn Coleman, director of the League of California Cities, said in a written statement. 

Even so, the league said it does not yet have a formal position on the new measure.

The bargain also removed an especially convoluted constitutional amendment from the ballot that was designed to ensnare the Howard Jarvis Taxpayers Association by requiring any future proposition that wanted to hike the voter threshold needed to pass a law (say, from 50% to two-thirds) to itself pass by the higher threshold. 

What about transfer taxes?

Left out of the compromise is anything about transfer taxes, a topic that has dominated the public debate over the proposition and provided much of the fuel for its earlier signature gathering campaign. 

On Monday, Wicks, who is aligned with the pro-development “Yes In My Backyard” movement, rolled out Assembly Bill 736 as a possible legislative off-ramp. The bill would have capped transfer taxes at between 1.5% and 3%, depending on the type of tax. That’s well above the Howard Jarvis-backed cut-off, but would have been a significant rate cut for a handful of high-tax municipalities like Los Angeles, Santa Monica, Culver City, San Jose and San Francisco. 

For Wicks and her YIMBY allies, the bill is seen as more than a simple electoral instrument. Pro-development groups have pointed to high transfer taxes as one of many impediments to the construction of much-needed housing.

The proposal also got the backing of the California Business Roundtable, a large business coalition whose members include major real estate investors and which has been bankrolling the Howard Jarvis Taxpayers Association’s campaign. 

With the funders endorsing a legislative compromise, it seemed possible that the taxpayers association would also be willing to back the lower tax cap.

The political pressure ratcheted up even further on Wednesday. As Politico first reported, the heads of three major real estate investment firms said that they were ready to spend at least $10 million battling the measure if Coupal didn’t back down.

Until the final hours, it seemed like he wouldn’t.

“We’ve had lots of partners help us qualify this initiative, but we are the ultimate decider as to whether or not we proceed with our initiative,” said Jon Coupal, the association’s president told CalMatters earlier this week. “It is our intention to proceed.”

Striking a deal that could make it harder to raise new local taxes represents a long-sought policy win for the taxpayer group. Capping transfer taxes appears to have been less of a priority.  The Wicks bill “is floating out there which people can support or not support, it’s up to them,” he said.

But the political calculus over AB 736has changed. Even before Thursday’s deal was announced, an ideologically diverse array of interest groups had already rallied to defeat it: The California Association of Realtors, local government groups, many affordable housing developers and tenant rights advocates.

Without a proposition hanging over their head anymore, legislators aren’t likely to have much appetite to take such a difficult vote.

All eyes on LA

The transfer tax omission comes as a disappointment to many real estate interests and pro-development advocates, particularly in Los Angeles, which has been the center of the statewide debate over transfer taxes this year.

Since 2023, the city has had the among the highest transfer taxes in California in the form of Measure ULA. That policy, backed by the city’s voters, places a 4% tax on real estate sales over roughly $5 million and 5.5% on those just above $10 million. So far it’s raised more than $1.2 billion for affordable housing, renter assistance and eviction defense. 

But despite the “mansion tax” moniker, the tax also applies to apartment developments, condos, commercial and industrial projects. A number of academic analyses have blamed the tax for the city’s abnormal drop in new multifamily housing construction and for reducing property tax revenue. Politically, the animosity toward Measure ULA by Los Angeles-based real estate developers and investors has provided significant fuel behind the Howard Jarvis measure, the proposition’s backers have said.

“It’s crazy that poorly designed transfer taxes like Measure ULA spurred this effort, but at the end of the day, Measure ULA and other similar measures will remain untouched,” said Mott Smith, chairman of the Council of Infill Builders and prominent advocate for changing the L.A. tax.

Change may still be on the docket for Los Angeles. Earlier this month, the city council voted to put a measure on the local ballot to exempt apartment and mixed-use buildings from the higher transfer tax within the 10 years of construction. That proposal is expected to get a final council vote next week.

The failure to address transfer taxes only reinforces the need for Los Angeles to act, said Leo Daube, a spokesperson for Councilmember Katy Yaroslavsky, who introduced the proposed change. 

“If Sacramento is not going to do it, then Los Angeles should,” he said.

Yue Stella Yu contributed reporting