User cost, fiscal effects, and deadweight loss: Evidence from TCJA and owner-occupied housing

This paper evaluates the efficiency implications of the 2017 Tax Cuts and Jobs Act (TCJA) for the owner-occupied housing market. The longstanding favorable tax treatment of homeownership—the non-taxation of imputed rent combined with deductions for mortgage interest and property taxes—distorts investment decisions and generates deadweight loss (DWL). We employ a microsimulation model using data constructed from the American Housing Survey to examine how TCJA altered housing decisions. We then assess the resulting implications for user cost, DWL, and tax expenditures. We find that TCJA reduced the annual DWL associated with owner-occupied housing by 58%, from $7.63 billion to $3.24 billion. These estimates are equivalent to 11 and 7% of total tax expenditures in 2017 and 2018, respectively. This efficiency gain was primarily driven by the sharp decline in itemization, from 31% to 11%, following the near doubling of the standard deduction, the introduction of the State and Local Tax (SALT) cap, and the reduction of the cap on deductible mortgage interest. The reform increased average owner-occupied user cost by 44 basis points, though the resulting effects on DWL and tax expenditures were heterogeneous. DWL reductions were concentrated among higher-income households, reaching up to $395 per household for the top income group (over $500 K). In contrast, tax expenditure reductions were greatest among lower-income households, with declines of roughly 37% for the bottom two income groups compared with 20% for the top two income groups. Geographically, the largest impacts were observed in high-cost, high-tax states.