The purpose of this paper is to provide a new framework to analyze the potential role of the federal tax treatment of housing in the patterns of metropolitan development. The framework the author uses to address the issue has a very different focus from that of the basic urban model. Following the work of Voith and Gyourko (1998), the author develops an equilibrium model of two communities, one of which has fixed boundaries and the other does not. The author calls the fixed boundary community the city and the unbounded community the suburb. Individuals in these communities are assumed to have similar systematic tastes over housing and community amenities, but they also have an idiosyncratic preference for either the city or the suburb. For a given individual, the relative attractiveness of the city and the suburbs depends on his or her idiosyncratic taste, the relative amenities of the city and suburbs, and the relative price. Community amenities are endogenously determined and are assumed to depend on the distribution of high and low income individuals. High concentrations of low income residents in a community potentially can adversely affect the attractiveness of the community. Within this framework, the author examines the residential choices of high and low income individuals with and without zoning constraints. Given these outcomes, the author evaluates the relative profitability of communities choosing exclusionary zoning or not by comparing the aggregate land values under both regimes. ; In this framework, the author shows that housing-related tax incentives are likely to create incentives for suburban communities to enact exclusionary zoning. To the extent that these incentives actually result in more exclusionary zoning, it reinforces the marginal effects on decentralization and sorting that result from the tax code’s effects on individuals’ choices regarding land consumption and residential location. This is an important result because it suggests that the spatial and sorting impact of the tax treatment of housing may be larger than its effects on individuals’ choices of residential location and housing consumption alone. In fact, under reasonable parameterizations, the tax incentives can result in large changes in equilibrium land prices, community choices, and community characteristics.
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number
99-22.
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