Many of the world's wealthy countries provide fiscal incentives to
homeowners. However, the impact of such tax breaks on housing tenure
decisions is unclear. Many existing policies, aimed at promoting house
purchases and widely used among taxpayers, have proved to be both
expensive and not targeted, thus creating controversy about their overall
effect. This paper aims to shed light on the effectiveness of such fiscal
incentives by providing empirical evidence on their impact on housing
tenure decisions. Specifically, this work focuses on the effect of mortgage
interest deduction (MID) on home-ownership in the United States. To
answer this question, the panel survey data from PSID for the period 2001
to 2011 is used. To identify the effect of MID on home-ownership, this
paper analyses two channels through which MID affects user cost of
housing: first, changes in personal state income tax rates; second, changes
in the standard deduction allowed at the state level. Variation in these fiscal
policy parameters allows for the identification of the causal effect of MID on
home ownership for several reasons. Firstly, in presence of MID, higher
marginal tax rates lead to higher tax savings from housing, other things
been equal. On the other hand, lower standard deduction increases a
fraction of households that qualify for this program. Moreover, both statelevel
standard deductions and state personal income tax rates are set
independently by each state and were revised several times during the
analyzed period. This fact creates a quasi-experimental set up which allows
for exploiting the difference-in-differences estimation strategy. The
identification of the effect of MID on home-ownership proposed in this paper
relies on large changes in fiscal policy. The largest of these changes led to
an increase in income tax rate by as much as 23,9% and to a decrease in
the standard deduction by 7,2% between 2002 and 2004. The estimates
suggest that increases in income tax rates in a state that allows mortgage
interest deduction is associated to a 2 percentage point increase in homeownership
relative to states that didn't change their fiscal policy.
Furthermore, in states where more households were able to qualify for MID
because of the lower standard deduction, home-ownership increased by 4,8
percentage points relative to control states. Thus, this study suggests that MID has a positive effect on home-ownership decisions. The results are
robust to a range of alternative specifications and have wide ranging policy
implications.