Working Paper: NBER ID: w14253
Authors: James M. Poterba; Todd M. Sinai
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.
Keywords: No keywords provided
JEL Codes: H2; H24; H71; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mortgage interest deduction (G21) | tax revenues (H29) |
| repeal of property tax deduction (H20) | tax revenues (H29) |
| repeal of mortgage interest deduction (G51) | marginal cost of owner-occupied housing (R21) |
| local government responses to federal tax changes (H71) | user cost of housing (R21) |
| behavioral response of homeowners (R21) | tax revenues (H29) |
| marginal tax rates and itemization status (H20) | effective cost of housing services (R31) |
| elasticity of demand for mortgage borrowing (G21) | borrowing adjustments (G51) |