STATE INCOME-TAXES AND HOMEOWNERSHIP - A TEST OF THE TAX ARBITRAGE THEORY

Since states have different income taxes, the marginal tax rate in the top tax bracket varies across states. According to the tax arbitrage theory of homeownership, the frequency of homeownership in any given t ax bracket ought to be lower in states with higher top tax rates. To t est this hypothesis, we estimated a probit model of homeownership usin g data on over 16,000 families from 38 different states. As hypothesiz ed, we found that a family was less likely to own its home if it lived in a state with a high top tax rate. We also found that it was more l ikely to own its home if it had a high marginal tax rate. (C) 1994 Aca demic Press, Inc.