Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Research: Tax benefits for housing not as outsized as previously thought

21.08.2014

New research co-written by a University of Illinois expert in urban economics indicates that tax benefits for housing, including the ever-popular mortgage interest deduction and the property tax deduction, are not as distortionary as previous research and some prominent critics suggest.

The existing system of tax benefits for housing caused the typical house to be 4 percent too large in 2007, creating a national economic waste of $7 billion per year – a figure that is substantially smaller than recent estimates by other economists, including some who have pegged the figure in the $16 billion to $36 billion range, says David Albouy, a professor of economics at Illinois.


Photo courtesy of David Albouy

Although popular with the public, reforming the existing system of tax benefits to housing, including the ever-popular deductions for mortgage interest and property taxes, would likely make the housing market more efficient, says research co-written by David Albouy, a professor of economics at Illinois.

“These deductions, especially for mortgage interest, have long been criticized for being expensive, regressive and not well targeted to their stated goal of subsidizing home ownership,” Albouy said. “Although these criticisms have some merit, I went into this project thinking it was much worse than it actually turned out to be.”

Although popular with the public, the mortgage interest deduction isn’t the best policy because it’s not very progressive, Albouy says. Getting rid of it would likely make the housing market more efficient.

“The people who are reaping the biggest benefits from the mortgage interest deduction and other housing tax benefits are the same people who have the biggest houses and the biggest incomes,” he said.

“That said, people in bigger houses do pay more in property taxes, without getting much more in local services. When we think about the size of a house, property taxes are like an excise tax. Property taxes encourage people to consume smaller houses while federal tax benefits do the opposite, and go somewhat overboard in doing so.”

According to the paper, which was co-written by Andrew Hanson of Marquette University, housing tax benefits affect not only the quantity of housing that people consume, but also where housing is located. The paper’s simulations show that 15 percent of the population is “inefficiently located” at a cost of $26 billion annually.

“It turns out that, because of the federal tax code, houses are not only slightly too big, but also rather badly located,” Albouy said. “In general, workers are discouraged from living in high-wage areas because they pay more in federal taxes without receiving more in federal benefits.”

Housing tax benefits offset this second “locational” distortion because high wage areas also tend to have high housing prices. For example, a worker in Illinois who moves from downstate Bloomington to Chicago will earn more and pay higher housing prices. They then pay higher federal and state taxes on their income, but can claim larger deductions from their bigger mortgages.

“It’s almost like their taxes are being lowered to account for their higher costs-of-living,” Albouy said. “And unlike owners, renters receive no such break.”

On the other hand, one of the consequences of housing tax policy that Albouy found “curious” is that it encourages too many people to buy houses in places with the highest quality of life  – “places that are beautiful, sunny and coastal.”

“Take someone who owns a very expensive beach bungalow in Honolulu,” he said. “Chances are they’ve paid a lot for that bungalow, and so they are receiving a huge tax write-off. Workers also tend to earn lower incomes in Honolulu than in, say, Chicago. So they’re making less, and writing off more, meaning the federal tax code is implicitly subsidizing people to live by the beach. Employers will follow suit, as this implicit loophole is similar to an untaxed fringe benefit like a company car. The federal tax code may be one reason why Google just opened an office in the Los Angeles beach town of Venice.”

According to Albouy, there is “no apparent reason” for the government to subsidize living in these high quality-of-life areas.

“Economists believe it is efficient for buyers to bid competitively over desirable land,” he said. “But to encourage their bidding war by lowering their tax burden when they bid higher appears wasteful.”

Eliminating the favorable tax treatment of housing would produce few gains in location, as people tend to pay higher housing prices for jobs rather than for quality-of-life reasons. More efficient reforms might eliminate housing benefits altogether and deflate taxable income by local costs-of-living, Albouy said.

“Such an indexing could be further improved by adjusting for local quality of life, which would be equivalent to indexing taxes to local wage levels for different skill-levels of workers,” he said. “In either case, more would need to be done to tie property taxes to local services used, rather than to the size of a house.”

While lowering federal tax benefits to housing would likely be efficient, eliminating them completely would cause houses to be too small by about 2 percent, the paper says. Without any offsetting compensation for local cost-of-living, a complete elimination of federal tax benefits for housing would also cause workers to live further away from higher-paying jobs, causing an economic waste of roughly $20 billion per year.

In general, reforming the tax code for housing tends to be quite popular with economists, but not with the public, Albouy said. In a recent poll, 77 percent of tax economists favored repealing the mortgage interest deduction, while only 10 percent of the public favored repealing the popular tax break.

“There’s a big chasm of understanding between economists and the public over the mortgage interest deduction,” he said. “Hopefully, we can meet somewhere in the middle. “

Albouy’s next research project examines the rising cost of housing as a share of household income.

“As society gets richer, one would expect to spend less on housing – but that’s not the case,” he said. “Our economy has grown richer, but we spend a greater proportion of our income on housing. And the reason why is that housing has gotten more expensive relative to other goods.”

Albouy is a faculty research fellow at the National Bureau of Economic Research, and a research associate of the Center for Business and Public Policy at Illinois.

The paper is an excerpted chapter from the forthcoming book “Tax Policy and the Economy, Volume 28,” published by the National Bureau of Economic Research.

Editor's note: To contact David Albouy, call 217-300-2654; email albouy@illinois.edu.

The paper, “Are Houses Too Big or In the Wrong Place? Tax Benefits to Housing and Inefficiencies in Location and Consumption,” is available online.

Phil Ciciora | University of Illinois at Urbana-Champaign
Further information:
http://news.illinois.edu/news/14/0820taxbenefits_housing_DavidAlbouy1.htm

Further reports about: benefits break expensive income interest quality-of-life

More articles from Business and Finance:

nachricht RWI/ISL Container Throughput Index: Moderate growth of world trade continues
21.05.2015 | Rheinisch-Westfälisches Institut für Wirtschaftsforschung e.V.

nachricht How long do firms live? Research finds patterns of company mortality in market data
02.04.2015 | Santa Fe Institute

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Solid-state photonics goes extreme ultraviolet

Using ultrashort laser pulses, scientists in Max Planck Institute of Quantum Optics have demonstrated the emission of extreme ultraviolet radiation from thin dielectric films and have investigated the underlying mechanisms.

In 1961, only shortly after the invention of the first laser, scientists exposed silicon dioxide crystals (also known as quartz) to an intense ruby laser to...

Im Focus: Advance in regenerative medicine

The only professorship in Germany to date, one master's programme, one laboratory with worldwide unique equipment and the corresponding research results: The University of Würzburg is leading in the field of biofabrication.

Paul Dalton is presently the only professor of biofabrication in Germany. About a year ago, the Australian researcher relocated to the Würzburg department for...

Im Focus: Basel Physicists Develop Efficient Method of Signal Transmission from Nanocomponents

Physicists have developed an innovative method that could enable the efficient use of nanocomponents in electronic circuits. To achieve this, they have developed a layout in which a nanocomponent is connected to two electrical conductors, which uncouple the electrical signal in a highly efficient manner. The scientists at the Department of Physics and the Swiss Nanoscience Institute at the University of Basel have published their results in the scientific journal “Nature Communications” together with their colleagues from ETH Zurich.

Electronic components are becoming smaller and smaller. Components measuring just a few nanometers – the size of around ten atoms – are already being produced...

Im Focus: IoT-based Advanced Automobile Parking Navigation System

Development and implementation of an advanced automobile parking navigation platform for parking services

To fulfill the requirements of the industry, PolyU researchers developed the Advanced Automobile Parking Navigation Platform, which includes smart devices,...

Im Focus: First electrical car ferry in the world in operation in Norway now

  • Siemens delivers electric propulsion system and charging stations with lithium-ion batteries charged from hydro power
  • Ferry only uses 150 kilowatt hours (kWh) per route and reduces cost of fuel by 60 percent
  • Milestone on the road to operating emission-free ferries

The world's first electrical car and passenger ferry powered by batteries has entered service in Norway. The ferry only uses 150 kWh per route, which...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International symposium: trends in spatial analysis and modelling for a more sustainable land use

20.05.2015 | Event News

15th conference of the International Association of Colloid and Interface Scientists

18.05.2015 | Event News

EHFG 2015: Securing health in Europe. Balancing priorities, sharing responsibilities

12.05.2015 | Event News

 
Latest News

Siemens will provide the first H-class power plant technology in Mexico

28.05.2015 | Press release

Merging galaxies break radio silence

28.05.2015 | Physics and Astronomy

A New Kind of Wood Chip: Collaboration Could Yield Biodegradable Computer Chips

28.05.2015 | Information Technology

VideoLinks
B2B-VideoLinks
More VideoLinks >>>