Eliminating housing tax preferences: A distributional analysis

We examine the distributional impact of potential changes in the tax treatm ent of owner-occupied housing in this paper, In particular, we focus on the removal of mortgage interest and local property tax deductibility. A theor etical model of the demand for housing is developed that captures the impac t of removing these deductions on housing demand. Then, we use a large cros s section of individual income tax returns from the Internal Revenue Servic e for 1990 to estimate the distributional effects of removing housing deduc tions. Taxpayers are ranked by income and tax liability, both with and with out the housing deductions. By comparing tax liability under the alternativ e regimes, and composing measures of the distributional impact of removing housing tax deductions using the classic Suits index, we assess both revenu e neutral and nonrevenue neutral distributional effects. Results in both ca ses indicate that the removal of the tax deductibility of mortgage interest and property taxes would increase the progressivity of the income tax subs tantially. (C) 2001 Academic Press.