Title

Essays on federal tax policy for housing and urban redevelopment

Date of Award

2008

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

Keywords

Empowerment zone, Tax credit, Mortgage interest deduction, Tax incidence, Urban redevelopment, Federal tax policy

Subject Categories

Economics | Social and Behavioral Sciences | Urban Studies and Planning

Abstract

This dissertation consists of three essays on the economics of federal tax policy for housing and urban redevelopment. The first two essays examine the federal Empowerment Zone wage tax credit, a wage subsidy that is targeted based on the geographic location of employers and employees. In the first essay, I measure a utilization rate for the Empowerment Zone tax credit based on how many employees in the targeted area are claimed for the credit. In the second essay, I design a method for testing the effect of the Empowerment Zone tax credit on local economic outcomes and empirically estimate these effects. In the final essay, I design a method to test the economic incidence of the federal mortgage interest deduction subsidy and empirically estimate how the subsidy is split between lenders and borrows in the market for home purchase loans.

The first essay provides estimates of utilization for the Empowerment Zone (EZ) wage tax credit, a subsidy claimed by employers who operate in and hire residents of federally designated areas experiencing economic distress. I show that about 6.4 percent (and at least 3.5 percent) of the working age population was claimed under the EZ wage credit in 1999. In addition, I estimate that 24.2 percent (and at least 13.1 percent) of those employed inside of the target area were claimed for the credit. These measures of tax credit use are an alternative to the use rate of firms that are presented in the existing literature, and reveal how effective the credit is at reaching residents of the target area.

The second essay uses the federal Empowerment Zone wage tax credit as a natural experiment to assess the effectiveness of geographically-targeted tax incentives at increasing local employment and reducing poverty. I estimate the effect of the wage tax credit by comparing areas that received an Empowerment Zone with areas that applied for an Empowerment Zone but were awarded a less generous assistance package (that did not include the wage tax credit). To account for the endogenous nature of the EZ designation process I use an instrumental variables regression. The results of instrumental variables regressions contradict the standard OLS estimates, and suggest that the tax incentives had no effect on local employment and poverty rates in the targeted areas, although this result is statistically imprecise. I find evidence that the null findings are driven by both inelastic labor supply of residents and capitalization of the tax credit into local property values.

The third essay examines the economic incidence of the mortgage interest deduction, or MID. I identify how the subsidy is split between lending institutions and borrowers using the rules for claiming the MID as exogenous factors that determine the demand for debt financed housing. I find evidence that lenders charge a higher interest rate on loans where the MID can be claimed on the full loan than on loans where marginal borrowing is not covered by the deduction. I estimate that the interest rate on marginal borrowing without the MID is on average 7.8 percent lower and between 6.8 and 9 percent lower than borrowing with the MID. I conduct several robustness checks that support the validity of these findings. My results suggest that between 20 and 36 percent of the subsidy created by the mortgage interest deduction is captured by lenders in the form of higher interest rates.

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