Federal income tax provisions allow the homeowner to deduct expenditures for mortgage interest and property taxes and do not include net imputed rent in the income tax base. These tax expenditure benefits result initially in a nominal subsidy in the amount of the tax benefits. Most previous research on homeowner tax preference benefits focuses on assessing the distribution pattern of these nominal benefits which are heavily concentrated among higher income households.; This research effort probes beyond the initial distribution of the nominal benefits of housing tax expenditures or statutory incidence analysis. The analysis focuses on the chain of adjustments resulting from this initial distribution of benefits which leads to a differing final distribution of benefits or economic incidence of tax expenditure benefits. All of the initial nominal tax expenditure benefits do not represent real income gains for the consumer. Initially within a partial equilibrium framework the nominal gains to the consumer are shown to exceed their real income gains as measured by increases in consumer surplus. The tax preference benefits are then further assessed within the context of a Harberger general equilibrium framework which suggests further erosion of benefits to the homeowner through shifting of benefits to owners of capital in general.; Comparison of nominal tax benefits with consumer surplus gains is developed within a neoclassical consumer decision model. The effect of tax preferences on consumer demand for housing is partitioned into substitution and income effects which can be used to assess changes in compensating and equivalent consumer surplus measures. Empirical measurement using information from a sample of 1973 income tax records suggests that up to 20 percent of nominal tax benefits depending on the consumer surplus measure used do not represent real income gains to the consumer. These results vary by income class with little difference between nominal benefits by income class for low income households and differences as great as 40 percent for high income households.; Tax preference benefits are then assessed within a Harberger general equilibrium incidence model to assess possible transmission of benefits from homeowners to other sectors of the economy. Within this broader context, it is shown that tax preferences can result in increases in the price of housing services and the rate of return or capital. The tax benefits are thus shifted from homeowners to owners of capital in general. The extent of such shifting depends on the time frame of analysis and measures of the elasticity of factor substitution in the economy. In the long run when the elasticity of factor substitution is infinite, the relative prices of capital and housing are unaffected and the measures of consumer surplus gain developed in the partial equilibrium analysis are unaffected. In the short or intermediate term, both the relative price of housing and rate of return on capital are increased shifting benefits to owners of capital.
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