NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Geographic Distribution of Housing-Related Tax Benefits

"Homeowners in just three large Consolidated Metropolitan Statistical Areas - Los Angeles-Riverside-Orange County, New York-Northern New Jersey, and San Francisco-Oakland-San Jose -- receive more than 75 percent of the country's positive net tax subsidy benefits."

Much attention has been paid to the tax treatment of owner-occupied housing in the United States. For example, we know that the tax subsidy to homeownership - attributable to the rental value of living in the house not being taxed while mortgage interest and property taxes are deductible - favors owners with high incomes and high house prices. However, little is known about the geographical distribution of these tax benefits. Do some areas of the country receive a greater annual share of this subsidy? Would resources flow from one area of the country to another, or would house prices in some areas be more affected, if there were a change in this tax benefit?

In The Spatial Distribution of Housing-Related Tax Benefits in the United States (NBER Working Paper No. 8165), authors Joseph Gyourko and Todd Sinai address these and other questions. To estimate how the tax subsidies are distributed, the authors use data from the 1990 census to compute the difference in taxes currently paid and the taxes homeowners would pay if there were no preferential treatment for housing. They find that the subsidy is highly skewed geographically, with a few areas receiving large subsidies and most receiving small ones. The value of the tax subsidy nationally is quite large, totaling nearly $164 billion in 1989.

If this revenue loss is netted out on a per-household lump-sum basis, fewer than 20 percent of states and 10 percent of metropolitan areas receive net positive subsidies. The metropolitan areas are located almost exclusively along the California coast and in the Northeast corridor between Boston and Washington, D.C. California is a good example of the disproportionate distribution of tax subsidies. Its owners receive 25 percent of the national aggregate subsidy flow, about $41 billion, while being home to only 10 percent of the country's homeowners. Even after accounting for program financing costs, California alone still receives a $23 billion annual net benefit, more than the other 11 net positive beneficiary states combined.

Similarly, homeowners in just three large Consolidated Metropolitan Statistical Areas - Los Angeles-Riverside-Orange County, New York-Northern New Jersey, and San Francisco-Oakland-San Jose -- receive more than 75 percent of the country's positive net tax subsidy benefits. And, within a number of the larger metropolitan areas, the top quarter of homeowners receives more than 70 percent of the total subsidy flow. The distribution within metropolitan areas also varies widely: in many smaller areas, especially in the interior of the country, the benefits tend to be distributed fairly evenly, but in larger, more populous areas, the benefits are skewed towards a small fraction of homeowners.

The results of this study help to explain why the current subsidy arrangement has persisted. Those who are worse off because of the subsidy program do not lose much, while those who benefit live mainly in major metropolitan areas and gain a great deal.

-- Les Picker


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