Tax Reform and Housing

Abstract

Current tax law provides tax advantages to owner-occupied housing that increase with a household's income. This well understood fact has led to periodic proposals to substitute a tax credit equal to, say, 25 percent of housing-related expenses for their current deductibility. Because all of the tax reforms considered in this paper (Hall-Rabushka, Kemp-Kasten and Bradley-Gephardt) move toward a flat rate schedule, they all will sharply reduce the tax-advantages of owner-occupied housing to higher income households relative to lower income households. In fact, our analysis suggests that all reforms will lower the price of obtaining housing services from owner-occupied housing for these households and raise it for higher-income households. The "breakeven" income at which the price of these housing services would be unchanged is about $55,000 for Kemp-Kasten and Hall-Rabushka probably$10,000 less for Bradley-Gephardt. The price of renting housing should rise under all reforms, probably by 5 to 10 percent. In combination with the decline in the price of obtaining housing services for middle and lower income households, this should give a signficant boost to homeownership. Under Kemp-Kasten, ownership rates will rise for four-member households with AGI (as renters) of under $60,000; for higher income households ownership could decline marginally. The breakeven income level is roughly$40,000 for Bradley-Gephardt and $35,000 or Hall-Rabushka.