Estimating demand for owner-occupied housing subject to the income tax

Abstract

The federal income tax code includes several provisions which benefit homeowners. First, the imputed rent from the ownership of a house is not incorporated into a household’s taxable income. Second, mortgage interest and property tax payments are tax deductible. Finally, capital gains go untaxed if they are reinvested. These provisions reduce the effective price of housing services by reducing the factor prices for land and structure; but they do not reduce the price of operating inputs nor do they necessarily reduce the prices of land and structure proportionately. Thus, they alter the optimum factor input combinations in the production of owner-occupant housing services by influencing relative factor prices. The homeowner tax provisions also increase effective income if the deductions and exclusions are large enough to shift the households into a lower tax bracket. In this case, the household receives an effective income transfer in the amount of income saved by not having to pay taxes at a higher rate. Few attempts at quantifying owner-occupant demand behavior have systematically incorporated federal income tax provisions. None have considered the effects of these provisions on housing service production behavior. Maisel et al. [ 121 conducted a study in which income but not price was adjusted for taxes, while Straszheim [21], using household interview data, made an adjustment to the gross price of housing without adjusting income. In an analysis of the welfare effects of owner-occupant tax benefits, Laidler [l l] acknowledges that taxes alter both price and income, but uses an estimate of price elasticity which does not incorporate income tax provisions. Rosen [ 18, 191, however, has adjusted both price and income for taxes in a recent estimation of housing demand. While Rosen’s work represents a