THE IMPACT OF TARGETED HOMEOWNERSHIP TAX CREDIT PROGRAM: EVIDENCE FROM WASHINGTON, D.C.

Abstract

This study provides the first comprehensive empirical evidence on the economic impacts and distributional effects of the District of Columbia First-Time Homebuyer Credit program. This program is the only federal program that provides an income tax credit for targeted lower-income households to purchase homes in a central city. Based on IRS data, the findings indicate that the program is very successful and popular, with the participants accounting for 77 percent of all home purchasers in the District each year. Among them, the first-time homeowners represented 67 percent of all purchasers each year, a rate 27 percentage points higher than the national average. The largest cluster of program beneficiaries was those with incomes between $30,000 and $50,000, which corresponds to only about 42 to 69 percent of the area median income.

Using a three-stage intervention analysis, this study further finds that the program has significant impact on wealth creation through house price appreciation. The credit could explain most of the amenity-adjusted house price appreciation differentials between the District and its surrounding suburban markets, estimated at 4.9 percent each year. Larger distributional effects are observed in the District’s low/moderate-income and minority neighborhoods as compared to high-income and white neighborhoods and in the townhouse/condo sub-markets as compared to single-family detached units.

The intervention was also effective in stabilizing city neighborhoods, increasing local tax revenues, driving up owner housing supply through conversion of rental units, and reducing vacancy. However, it failed to stimulate a supple response in new construction from private sector. It also had some adverse effects on housing affordability since it appeared to have spurred an increase of voluntary displacements of District renters.

These results suggest that this targeted homeownership tax credit can serve as a strong incentive for encouraging first-time homeownership and a viable supplement/remedy to the existing tax treatments to homeownership. It represents an innovative approach to reviving central cities and their neighborhoods. The study contributes to the literature through a methodological advance, development of several key benchmarks, and improvements of our understanding of public subsidies.