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Capitalization of federal taxes, the relative price of housing, and urban form: density and sorting effects

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  • Richard Voith
  • Joseph Gyourko

Abstract

The authors investigate the impact of the tax treatment of owner-occupied housing on urban form in an economy in which high- and low-income households choose among city and suburban communities. Because housing tax policies differentially affect the relative, after-tax price of housing for high- and low-income households, and because the extent of capitalization of housing tax policies can differ across city and suburban communities, their analysis finds that housing tax policies can affect not only the density of the metropolitan area, but also can influence where rich and poor households choose to live.> > The authors also show that the impacts of housing tax policies differ depending upon whether land use constraints such as suburban large lot zoning exist. If there are no land use constraints present, increasing a subsidy to home ownership that is positively correlated with the income of the owner tends to lead to the decentralization of both rich and poor, although there are conditions under which the rich would choose to concentrate in the central city. The ambiguity of the effect on the choices of high income households suggests that impacts of the federal tax treatment of housing may differ across metropolitan areas.> > In the presence of binding large lot zoning in the suburbs, the rich have a greater incentive to decentralize while the poor are constrained to the city. Thus, housing tax policy that affects the relative price of land differentially for the rich and poor could have helped exacerbate the intense residential sorting by income that we see in many parts of the United States. Importantly, our analysis of community choice is not driven by different preferences for city or suburb that may be associated with the income elasticity of housing demand. Rather, it results from changes in relative after-tax housing prices faced by poor and rich households. Determining the empirical relevance of prices versus preferences in this matter should be an urgent task for future research.

Suggested Citation

  • Richard Voith & Joseph Gyourko, 2000. "Capitalization of federal taxes, the relative price of housing, and urban form: density and sorting effects," Working Papers 00-12, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:00-12
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    References listed on IDEAS

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    1. Stephen G. Cecchetti & Peter Rupert, 1996. "Mortgage interest deductibility and housing prices," Economic Commentary, Federal Reserve Bank of Cleveland, issue Feb.
    2. Peter Mieszkowski & Edwin S. Mills, 1993. "The Causes of Metropolitan Suburbanization," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 135-147, Summer.
    3. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
    4. Blackley, Dixie & Follain, James R., 1983. "Inflation, tax advantages to homeownership and the locational choices of households," Regional Science and Urban Economics, Elsevier, vol. 13(4), pages 505-516, November.
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    Cited by:

    1. 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.
    2. Maureen Kilkenny, 2010. "Urban/Regional Economics And Rural Development," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 449-470.
    3. Brueckner, Jan K., 2005. "Transport subsidies, system choice, and urban sprawl," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 715-733, November.
    4. Hanson, Andrew, 2012. "Size of home, homeownership, and the mortgage interest deduction," Journal of Housing Economics, Elsevier, vol. 21(3), pages 195-210.
    5. Edward L. Glaeser & Jesse M. Shapiro, 2003. "The Benefits of the Home Mortgage Interest Deduction," NBER Chapters,in: Tax Policy and the Economy, Volume 17, pages 37-82 National Bureau of Economic Research, Inc.
    6. Jenny Schuetz, 2008. "Guarding the Town Walls: Mechanisms and Motives for Restricting Multifamily Housing in Massachusetts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(3), pages 555-586, September.
    7. Gyourko, Joseph & Molloy, Raven, 2015. "Regulation and Housing Supply," Handbook of Regional and Urban Economics, Elsevier.
    8. Gyourko, Joseph & Molloy, Raven, 2015. "Regulation and Housing Supply," Handbook of Regional and Urban Economics, Elsevier.
    9. David Agrawal & William H. Hoyt, 2014. "State Tax Differentials, Cross-Border Commuting, and Commuting Times in Multi-State Metropolitan Areas," CESifo Working Paper Series 4852, CESifo Group Munich.

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    Keywords

    Housing ; Taxation;

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