Housing Tax Policy and Cities vs. Suburbs

As many urban areas struggle to revitalize following massive migrations to the suburbs, many governments are asking what they can do to make a difference, and many resort to tax preferences. The latest from Michigan courtesy the Lansing State Journal:

Gov. Jennifer Granholm signed bills Tuesday that allow Detroit and other urban areas to cut tax rates for some homeowners in an effort to encourage growth.

The law expands the 1992 Neighborhood Enterprise Zone Act – which allows tax abatements for new and rehabilitated housing – to include existing homes bought since 1998 and located in subdivisions platted before 1968.

Homeowners who live in Neighborhood Enterprise Zones pay lower property taxes than others.

Typically, owners of new homes built in an enterprise zone pay half the average property tax rate statewide. (Full Story)

The state of Michigan, through the state tax code, is attempting to lower the price of housing in urban areas relative to suburbs, all in an effort to entice more housing in urban areas like Detroit that have seen rapid flight over the past fifty years. There are many economic explanations for the rapid growth of suburbia (and parallel the decline of urban cores) throughout America, but one that has often been overlooked is the impact of the federal tax code and its treatment of housing.

In a paper written in March 1999, Richard Voith, a researcher at the Philadelphia Federal Reserve, wrote a piece entitled “Does the Federal Tax Treatment of Housing Affect the Pattern of Metropolitan Development?” Voith concludes that the subsidies of housing via the federal tax code’s deductions for local taxes and mortgage interest, which are only available to taxpayers who itemize, “increase the amount of land households wish to consume, and when there is zoning, they increase the likelihood that high- and low-income households will choose separate communities.”

The final paragraph of Voith’s work is particularly relevant to Governor Granholm’s goal: “As many urban communities struggle with high concentrations of poverty, and as suburban communities confront challenges associated with rapid, decentralized development, our analysis suggests that the mortgage and property tax deductions may make it more difficult to cope with these challenges.” (You can see Voith’s complete paper here.)

So in summary, we have two competing policies now in place in Michigan: the federal tax code encouraging housing in suburbs and the state of Michigan using tax policy to try and encourage housing in the cities.