The Tax Treatment of Housing and Its Effects on Bounded and Unbounded Communities

Three cases are analyzed showing that any public policy subsidizing home ownership differentially along income lines leads to increased residential sorting by income–beyond that implied by standard motivations to engage in fiscally exclusionary zoning.
The impact of sorting by income is greatest when suburban communities have the ability to impose large lot zoning constraints.
Tax subsidies to ownership that rise with income and exist with large lot zoning are associated with decentralization within the metropolitan area and weak central city land markets. Thus, decentralization and urban decline may be due at least partially to tax code-related policies.