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Does the tax treatment of housing create an incentive for exclusionary zoning and increased decentralization?

Author

Listed:
  • Richard Voith
Abstract
The purpose of this paper is to provide a new framework to analyze the potential role of the federal tax treatment of housing in the patterns of metropolitan development. The framework the author uses to address the issue has a very different focus from that of the basic urban model. Following the work of Voith and Gyourko (1998), the author develops an equilibrium model of two communities, one of which has fixed boundaries and the other does not. The author calls the fixed boundary community the city and the unbounded community the suburb. Individuals in these communities are assumed to have similar systematic tastes over housing and community amenities, but they also have an idiosyncratic preference for either the city or the suburb. For a given individual, the relative attractiveness of the city and the suburbs depends on his or her idiosyncratic taste, the relative amenities of the city and suburbs, and the relative price. Community amenities are endogenously determined and are assumed to depend on the distribution of high and low income individuals. High concentrations of low income residents in a community potentially can adversely affect the attractiveness of the community. Within this framework, the author examines the residential choices of high and low income individuals with and without zoning constraints. Given these outcomes, the author evaluates the relative profitability of communities choosing exclusionary zoning or not by comparing the aggregate land values under both regimes. ; In this framework, the author shows that housing-related tax incentives are likely to create incentives for suburban communities to enact exclusionary zoning. To the extent that these incentives actually result in more exclusionary zoning, it reinforces the marginal effects on decentralization and sorting that result from the tax code?s effects on individuals? choices regarding land consumption and residential location. This is an important result because it suggests that the spatial and sorting impact of the tax treatment of housing may be larger than its effects on individuals? choices of residential location and housing consumption alone. In fact, under reasonable parameterizations, the tax incentives can result in large changes in equilibrium land prices, community choices, and community characteristics.

Suggested Citation

  • Richard Voith, 1999. "Does the tax treatment of housing create an incentive for exclusionary zoning and increased decentralization?," Working Papers 99-22, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:99-22
    as

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    File URL: https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/1999/wp99-22.pdf
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    References listed on IDEAS

    as
    1. James M. Poterba, 1991. "House Price Dynamics: The Role of Tax Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 143-204.
    2. Peter Mieszkowski & Edwin S. Mills, 1993. "The Causes of Metropolitan Suburbanization," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 135-147, Summer.
    3. repec:bla:scandj:v:84:y:1982:i:2:p:293-311 is not listed on IDEAS
    4. Blackley, Dixie & Follain, James R., 1983. "Inflation, tax advantages to homeownership and the locational choices of households," Regional Science and Urban Economics, Elsevier, vol. 13(4), pages 505-516, November.
    5. Pogodzinski, J. M. & Sass, Tim R., 1994. "The theory and estimation of endogenous zoning," Regional Science and Urban Economics, Elsevier, vol. 24(5), pages 601-630, October.
    6. Patric H. Hendershott, 1982. "Government Policies and the Allocation of Capital Between Residential and Industrial Uses," NBER Working Papers 1036, National Bureau of Economic Research, Inc.
    7. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
    8. Martin Feldstein, 1983. "Inflation, Tax Rules, and the Accumulation of Residential and Nonresidential Capital," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 81-100, National Bureau of Economic Research, Inc.
    9. William T. Bogart, 1993. "'What Big Teeth You Have!': Identifying the Motivations for Exclusionary Zoning," Urban Studies, Urban Studies Journal Limited, vol. 30(10), pages 1669-1681, December.
    10. A. E. Holmans, 1964. "The Derived Demand Curve Fora Productive Factor And The Industry Supply Curve," Oxford Economic Papers, Oxford University Press, vol. 16(2), pages 235-261.
    11. Joseph Gyourko & Richard Voith, "undated". "The Price Elasticity of the Demand for Residential Land," Zell/Lurie Center Working Papers 329, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    12. Joseph Gyourko & Richard Voith, 1998. "The tax treatment of housing: its effects on bounded and unbounded communities," Working Papers 98-23, Federal Reserve Bank of Philadelphia.
    13. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
    14. Epple, Dennis & Romer, Thomas & Filimon, Radu, 1988. "Community development with endogenous land use controls," Journal of Public Economics, Elsevier, vol. 35(2), pages 133-162, March.
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    Cited by:

    1. Kurt Paulsen, 2013. "The Effects of Growth Management on the Spatial Extent of Urban Development, Revisited," Land Economics, University of Wisconsin Press, vol. 89(2), pages 193-210.
    2. Guerrieri, Veronica & Hartley, Daniel & Hurst, Erik, 2013. "Endogenous gentrification and housing price dynamics," Journal of Public Economics, Elsevier, vol. 100(C), pages 45-60.
    3. Joseph Gyourko & Richard Voith, 1998. "The tax treatment of housing: its effects on bounded and unbounded communities," Working Papers 98-23, Federal Reserve Bank of Philadelphia.
    4. Darren M. Scott & Kenneth Bruce Newbold & Jamie E.L. Spinney & Ruben Mercado & Antonio Páez & Pavlos S. Kanaroglou, 2009. "New Insights into Senior Travel Behavior: The Canadian Experience," Growth and Change, Wiley Blackwell, vol. 40(1), pages 140-168, March.
    5. Richard Voith, 1999. "Does the federal tax treatment of housing affect the pattern of metropolitan development?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 3-16.

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    Keywords

    Housing; Income; Taxation;
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