May 1, 1996

The Flat Tax and Housing Values

Download Special Report No. 59

Special Report No. 59

Executive Summary As tax reform develops, millions of homeowners will be concerned about the effect the new tax system will have on housing values. For many taxpayers, the equity built up in their home represents a large share of their total net worth. If tax reform appeared likely to reduce home values significantly, as some have suggested would occur, it would create a significant political obstacle to enacting tax reform. On the other hand, if it can be shown that tax reform would cause housing prices to rise; this would obviously improve the prospects for tax reform.

The flat tax designed by Professors Hall and Rabushka of the Hoover Institute and introduced as legislation in the U.S. Congress by Representative Richard Armey (R-TX) and Senator Richard Shelby (R-AL) includes a number of changes that would clearly affect the value of the nation’s housing stock. These changes include a change in tax rates and the elimination of: the capital gains tax, the home mortgage and property tax deductions, the tax on interest income, and the gift and estate tax. Each of these changes would affect housing prices, some offering the hope of greater appreciation, others clearly threatening to reduce housing values. This report summarizes work done at the Tax Foundation 1″ The Flat Tax and Housing Prices, by J .D. Foster,”Tax Foundation Background Paper 151 to net out the various tax changes’ effects.