Marc Verville's Rebuttal to Denny Zane

June 5, 2022

By Marc L. Verville

With all due respect to Mr. Zane, his response shows a complete disregard for the residents of Santa Monica and the fundamentals of economics of both the Himmelrich tax proposal and the city itself.

To be clear, the Himmelrich tax proposal’s rate is 804% (5.71% ÷ 0.71%) of the existing tax and is a 704% (5.00% ÷ 0.71%) increase over the existing tax, which is less than 1 percentage point. The Himmelrich proposal would increase the transfer tax at the threshold $8 million level to 5.71% from the current 0.71%, on the entire transaction value. That is the basic math that seems to elude both Mr. Zane and Ms. Himmelrich.

Mr. Zane disingenuously characterizes the current tax of 0.71% as “very tiny.” He then goes on to state that “the Real Estate Transfer Tax, in Santa Monica, has been very, very low for decades…” Santa Monica’s current transfer tax rate places it as the 14th highest across 482 California cities. The proposed rate would place it as THE highest rate in the state up to $25 million and even then, it would become the second highest only by a margin of 0.29% (the highest then being San Francisco).

It is not clear if Mr. Zane’s comments are driven by miscomprehension of fundamental economics, but, regardless, the proposed 5 percentage point (704%) increase in the tax would create an additional and immediate $400,000 liability on a property at the $8 million level, regardless of when it was purchased.

A $400,000 increase cannot be classified as “tiny” in anyone’s language except, perhaps, in Mr. Zane’s. The point is that the transaction values against which the tax rate is applied are huge and have been rapidly increasing for decades. The median home sales price in Santa Monica increased 240% from 2000 to 2018. The rate is likely to be closer to 300% today.

That would equate to a 5.6% annual growth rate in transfer tax receipts since 2000 assuming relatively constant number of transactions per year. To this point, Mr. Zane conveniently omits the fact that the sale of real property is likely the largest transaction in most residents’ lives. Thus, the tax impact reflects the size of the transaction. We are not talking about the sales tax on buying a gallon of paint at the hardware store.

And, while proposing such a tax, neither Mr. Zane nor Ms. Himmelrich felt responsible enough to the residents to do their homework and identify just what types or properties would be impacted.

Mr. Zane notes that “that (would) require going to Norwalk to examine individual transfer deeds.” So, while blithely proposing a $400,000 tax increase on residents’ transactions, the proponents of this tax cannot be bothered to identify who in the city will be most impacted. This represents an unimaginable disdain for the city’s residents and property owners.

According my analysis of property transactions in the past 12 months that would be subject to the Himmelrich tax proposal, (“New City Financial Plan: The Resident Homeowner Bank Part II: Who pays the proposed transfer tax and where does the money go?”), there were 45 qualifying transactions of which residential sales accounted for around 79% of the total real estate sales value.

Of that total, there were 34 single family residence sales accounting for around 78% of the residential sales value while five apartment house transactions of 5+ units represented about 21%.

As to Mr. Zane’s point that “a little more than 5% of total transactions” would be impacted and that “95% of transactions (in 2019)…would have been unaffected,” he fails to point out that without an inflation escalation clause, more and more properties will fall under the tax, which is why it has been so designed.

Then there is Mr. Zane’s comment that “with cities all over California in need of new revenues to cover growing costs.” But using such flawed logic, Mr. Zane also displays an amazing and complete absence of understanding of Santa Monica’s financial situation.

In reviewing the 121 cities nationwide with populations over 200,000, Santa Monica would rank in roughly the top 10 in revenue per resident. Looking at the California subset of those cities, and adding other cities such as Beverly Hills and Palo Alto, Santa Monica would rank at approximately #4 in revenue per resident.

Very few cities have the tax subsidies provided by tourism that Santa Monica has. And starting under prior city administrations pre-covid, the uncorrected decimation of the downtown is depriving the city of even more tens of millions annually in general tax revenues. So, generically lumping Santa Monica into an undefined “other cities” bucket is an exercise in complete misdirection, as well as inexcusably unresearched.

Meanwhile, the existing structure and level of city revenues has enabled the city to spend $1.4 billion on housing and community development (HCD) since 2004. Under the existing financial structure, the city spending on HCD overall has been a relatively consistent average of $60 million per year in the preceding five pre-covid years and $40 million in 2021. Moreover, the city has built over 4,000 affordable units since the 1980s and permitted 743 from 2013 to 2021.

The red herring that Mr. Zane throws out about Trump era tax legislation omits the fact that it limited deductions for property and state taxes paid by most homeowners in Santa Monica, having a negative effect on our residents.

Let’s not forget that the entire spending proposal omits funding for any infrastructure or services costs that the unrelenting building would generate. So, this tax is only the beginning, with additional taxation of the residents necessary over time to support a growing amount of non-revenue generating construction which, if it displaces retail, simultaneously reduces revenues, generating a deeper hole requiring even more new tax requirements.

Finally, the Himmelrich initiative is being marketed as reflecting the city’s values, but the proposal shields the resulting cash flow from the city’s elected representatives’ spending priorities, which negates the democratic expression of the city’s values.

The Brock proposal would provide for a level of bridge revenues (that must be governed by an included sunset provision) until our commercial activity returns to pre-pandemic levels and until we realize the significant cost savings opportunities that Ms. Himmelrich has admitted exist but has not effectively pursued.

And, importantly, it preserves the residents’ democratic control over the city’s values as expressed by Council authority over spending decisions.

Marc Verville is a member of the Santa Monica Audit Subcommittee who served as Vice President of Finance and Business Analysis at Warner Bros. before his retirement.

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