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Capitalization of Federal Taxes, the Relative Price of Housing, and Urban Form: Density and Sorting Effects


  • Richard Voith
  • Joseph Gyourko


We 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, our 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 impact of housing tax policies differs depending upon the extent to which the subsidy is capitalized into city land prices and whether a land use constraint such as suburban large lot zoning exists to make poorer households less mobile. If the rich and poor both are fully mobile, increasing a subsidy to home ownership that is positively correlated with the income of the owner leads to the decentralization of both rich and poor; the greater the extent of capitalization, the larger the decentralization impact. 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, it is only when the mobility of the poor is restricted that housing tax policy of the type we have in the U.S. could have helped exacerbate the intense residential sorting by income that we see in many parts of the country. Finally, it is noteworthy that 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, our conclusions arise 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.

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  • Richard Voith & Joseph Gyourko, "undated". "Capitalization of Federal Taxes, the Relative Price of Housing, and Urban Form: Density and Sorting Effects," Zell/Lurie Center Working Papers 366, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  • Handle: RePEc:wop:pennzl:366

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    References listed on IDEAS

    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. 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.
    4. 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.
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    Cited by:

    1. Gyourko, Joseph & Molloy, Raven, 2015. "Regulation and Housing Supply," Handbook of Regional and Urban Economics, Elsevier.
    2. 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.
    3. 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.
    4. 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.
    5. Maureen Kilkenny, 2010. "Urban/Regional Economics And Rural Development," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 449-470.
    6. Brueckner, Jan K., 2005. "Transport subsidies, system choice, and urban sprawl," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 715-733, November.
    7. Hanson, Andrew, 2012. "Size of home, homeownership, and the mortgage interest deduction," Journal of Housing Economics, Elsevier, vol. 21(3), pages 195-210.
    8. Joseph Gyourko & Raven Molloy, 2014. "Regulation and Housing Supply," NBER Working Papers 20536, National Bureau of Economic Research, Inc.

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