Tax Incentives for Homeownership and the Provision of Local Public Services in Low-and-Moderate Income Areas

Abstract

There is a substantial literature that assesses the distributional impact of the mortgage interest and state and local property tax deductions and the disparate incentives for buying a home across income groups, but virtually no work exists that evaluates the secondary effect on the provision of public services in high-income vis-à-vis low-income areas. In this paper we reveal significant geographic variation in homeowner tax subsidies in the State of Missouri. We then evaluate the impact that disparate subsidies have on the provision of local public services, specifically, schools. Estimating a structural model and performing a path analysis, we find that a 100 percent increase in the average homeowner tax subsidy yields a ten percent increase in local spending per student.

Keywords: mortgage interest, property tax, school spending

JEL Classification: H24, I22, R58