Tax Policy as a Hidden Driver of Housing Typology and Embodied Emissions in Virginia and California

• In Event: How State and Local Regulation Shapes Housing Density, Resilience, and Carbon Outcomes

Abstract

A growing body of scholarship under the banner of "abundance" argues that regulatory barriers to residential construction — zoning restrictions, permitting delays, and land use constraints — bear significant responsibility for the United States' persistent housing affordability crisis. These arguments have gained considerable traction among policymakers and have animated recent legislative reforms in several states. Yet this literature has paid insufficient attention to a parallel and underappreciated regulatory architecture: the federal, state, and local tax codes that quietly shape not only how much housing gets built, but what kind, where, and for whom. These choices, in turn, carry substantial consequences for housing equity, climate resilience, and the embodied carbon emissions embedded in the built environment.

This paper surveys and compares tax policy regimes governing residential construction across two high-stakes laboratories of state policy: Virginia and California. Drawing on federal tax provisions — including depreciation schedules, energy efficiency incentives under the Inflation Reduction Act, and the Low-Income Housing Tax Credit — alongside state-level sales tax exemptions, property tax assessment structures, and local development impact fees, we systematically analyze how these instruments interact to privilege or penalize specific building typologies and material choices. Critically, we find that the housing forms most rewarded by current fiscal structures — large-footprint single-family detached units in lower-density, car-dependent suburban corridors — diverge sharply from the housing most needed by the households and communities experiencing the greatest affordability stress: renters, lower-income households, younger workers, and seniors seeking to downsize, concentrated disproportionately in high-cost urban cores and inner-ring suburbs. California and Virginia offer a productive comparative pairing precisely because this demographic and geographic mismatch manifests differently across their distinct metropolitan geographies, fiscal architectures, and political economies.

Our analysis reveals that current tax policy in both states compounds this mismatch by simultaneously rewarding construction practices with high embodied carbon footprints and steering new supply away from the infill, transit-proximate, and higher-density contexts where both housing need and climate co-benefits are greatest. Even well-intentioned abundance-oriented reforms — upzoning, by-right permitting, accessory dwelling unit liberalization — risk being undermined if tax incentives continue to favor low-density, materials-intensive construction at the urban fringe. The households most burdened by housing costs are frequently those least served by the typologies that current fiscal rules make most financially attractive to developers.

This paper contributes to the federalism literature by demonstrating that subnational tax variation operates as a de facto housing distribution policy — one with regressive demographic effects and compounding environmental costs largely invisible in conventional policy analysis. We conclude with targeted reform proposals designed to realign fiscal incentives with both the supply-side ambitions of the abundance agenda and the geographic and demographic patterns of unmet housing need. As federal engagement in housing and climate policy grows less predictable, state tax design represents both an underutilized lever and an urgent research priority.

Author

• Andrew Hayashi, University of Virginia
  Presenting Author