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Tax Benefits to Housing and Inefficiencies in Location and Consumption

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  • David Albouy
  • Andrew Hanson

Abstract

Tax benefits to owner-occupied housing provide incentives for housing consumption, offsetting weaker disincentives of the property tax. These benefits also help counter the penalty federal taxes impose on households who work in productive high-wage areas, but reinforce incentives to consume local amenities. We simulate the effects of these benefits in a parameterized model, and determine the consequences of various tax reforms. Reductions in housing tax benefits generally reduce inefficiency in consumption, but increase inefficiency in location decisions, unless they are accompanied by tax-rate reductions. The most efficient policy would eliminate most tax benefits to housing and index taxes to local wage levels.

Suggested Citation

  • David Albouy & Andrew Hanson, 2014. "Tax Benefits to Housing and Inefficiencies in Location and Consumption," NBER Working Papers 19815, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19815
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    Cited by:

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    2. Hal Martin, 2018. "The Impact of the Tax Cuts and Jobs Act on Local Home Values," Working Papers (Old Series) 1806, Federal Reserve Bank of Cleveland.
    3. Dawkins, Casey J., 2023. "The geography of US homeownership tax expenditures," Journal of Housing Economics, Elsevier, vol. 59(PA).
    4. Lawrence M. Kessler & Donald Bruce, 2024. "A SALT on real estate? Housing market and migration responses to the limit on the state and local tax deduction," Contemporary Economic Policy, Western Economic Association International, vol. 42(4), pages 683-704, October.
    5. Albouy, David & Lue, Bert, 2015. "Driving to opportunity: Local rents, wages, commuting, and sub-metropolitan quality of life," Journal of Urban Economics, Elsevier, vol. 89(C), pages 74-92.
    6. Serena Fatica & Doris Prammer, 2018. "Housing and the Tax System: How Large Are the Distortions in the Euro Area?," Fiscal Studies, John Wiley & Sons, vol. 39(2), pages 299-342, June.
    7. David Albouy & Gabriel Ehrlich & Yingyi Liu, 2016. "Housing Demand, Cost-of-Living Inequality, and the Affordability Crisis," NBER Working Papers 22816, National Bureau of Economic Research, Inc.
    8. Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
    9. David S. Bieri & Casey J. Dawkins, 2019. "Amenities, affordability, and housing vouchers," Journal of Regional Science, Wiley Blackwell, vol. 59(1), pages 56-82, January.
    10. Doris Prammer, 2020. "Immovable property: where, why and how should it be taxed? A review of the literature and its implementation in Europe," Public Sector Economics, Institute of Public Finance, vol. 44(4), pages 483-504.
    11. Jørn Rattsø & Hildegunn E. Stokke, 2017. "National income taxation and the geographic distribution of population," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(5), pages 879-902, September.
    12. Wenli Li & Edison Yu, 2022. "Real Estate Taxes and Home Value: Evidence from TCJA," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 43, pages 125-151, January.
    13. Stefanie Braun, 2021. "Effects of Preferential Tax Treatment on German Homeownership," Working Papers 209, Bavarian Graduate Program in Economics (BGPE).
    14. Wenli Li & Edison Yu, 2020. "Real Estate Taxes and Home Value: Winners and Losers of TCJA," Working Papers 20-12, Federal Reserve Bank of Philadelphia.
    15. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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