Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects

45 Pages Posted: 18 Aug 2008 Last revised: 15 May 2012

See all articles by James M. Poterba

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Todd M. Sinai

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Date Written: August 2008

Abstract

The mortgage interest deduction, the property tax deduction, the unique treatment of capital gains on owner-occupied homes, and the absence of taxation on imputed rent from owner-occupied homes all influence the effective cost of housing services. They also affect federal income tax revenues and the distribution of income tax liabilities. We draw on household-level data from the 2004 Survey of Consumer Finances to analyze how several potential reforms would affect incentives for housing consumption as well as the distribution of income tax burdens. Our analysis recognizes that changing the mortgage interest deduction would induce changes in household financial behavior. We estimate that repealing the mortgage interest deduction in 2003 would have raised income tax revenues by $72.4 billion in the absence of any portfolio adjustments, but by only $61.9 billion if homeowners responded by drawing down a limited set of financial assets to partially replace their mortgage debt. The revenue effects of changing the property tax deduction similarly depend on how state and local governments alter their mix of revenue instruments in response to federal tax reform. Our results underscore the importance of recognizing behavioral responses when calculating the revenue costs of income tax provisions relating to owner-occupied housing.

Suggested Citation

Poterba, James M. and Sinai, Todd M., Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects (August 2008). NBER Working Paper No. w14253. Available at SSRN: https://ssrn.com/abstract=1231701

James M. Poterba (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Todd M. Sinai

University of Pennsylvania - The Wharton School ( email )

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HOME PAGE: http://real.wharton.upenn.edu/~sinai

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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