Capitalization of federal taxes, the relative price of housing, and urban form: density and sorting effects

We investigate the impact of the tax treatment of owner-occupied housing on urban form in an economy in which high and low income households choose among city and suburban communities. The spatial impact of housing tax policies differs depending upon the extent to which the subsidy is capitalized into city land prices and whether a land use constraint such as suburban large lot zoning exists to make poorer households less mobile. The greater the extent of capitalization, the larger the decentralization impact. And, in the presence of binding large lot zoning in the suburbs, the rich have a greater incentive to decentralize while the poor are constrained to the city. It is noteworthy that our analyses of community choice and residential sorting by income are not driven by different preferences for city or suburb that may be associated with the income elasticity of housing demand. Rather, our conclusions arise from changes in relative after-tax housing prices faced by poor and rich households. Determining the empirical relevance of prices versus preferences in these matters should be an urgent task for future research. (C) 2002 Elsevier Science B.V. All rights reserved.