Case Study #2: Property Tax Deduction for Owner-Occupied Housing
The federal individual income tax code permits taxpayers who itemize to claim a deduction for their local real estate (property) taxes. However, the deduction is controversial. Two criticisms are that it is mostly claimed by upper-income taxpayers, and that it softens people’s opposition to high taxes and wasteful spending by local governments, because some of those taxes can be written off at the federal level. Two defenses of the deduction are that it better measures people’s incomes, recognizing that some of their income has been transferred to others, and that the bulk of the local property taxes fund the public schools, increasing human capital, the cost of which could arguably be deductible, as with other capital formation. Nevertheless, the purpose of this case study is not to discuss the merits or demerits of the deduction but is simply to examine the growth effects if the deduction were repealed.