The geography of US homeownership tax expenditures

Abstract

US homeowners receive income tax deductions for mortgage interest payments and state and local property taxes, pay no income tax on their home's imputed rental income, and may exclude most of the capital gains earned from a home sale. This paper characterizes the geographic distribution of the tax expenditures from these tax preferences using a new method that exploits household-level microdata from the 2019 Census Public Use Microdata Sample to simulate homeownership tax expenditures at the Public Use Microdata Area level. I estimate that in the 2018 tax year, $226.05 billion in taxable revenue was lost to the mortgage interest deduction ($28.20 billion), the property tax deduction ($9.51 billion), the exclusion of net imputed rental income ($134.82 billion), and the partial exclusion of housing-related capital gains ($53.52 billion). Large metropolitan areas and neighborhoods with high housing prices receive subsidies in excess of the cost of funding homeowner tax preferences, while the burden of homeowner tax preferences falls heavily on rural areas. If federal income tax law reverted to what existed just prior to the 2017 Tax Cuts and Jobs Act, these geographic disparities would be exacerbated.