What's so bad about inclusionary zoning?

A nice sounding policy with bad outcomes

Inclusionary zoning might sound nice, but it is the opposite of “inclusionary”. It exacerbates racial segregation and disparities; it increases urban sprawl; it’s a barrier to economic opportunity; it’s inefficient; it encourages car culture; it infringes on property rights; and it hurts the environment and public health. Semantically it would appear that its seeming inverse policy, inclusionary zoning (IZ), would be better. All of the evidence suggests; however, that that assessment is entirely wrong. 

What is inclusionary zoning?

 Inclusionary zoning includes any law that requires developers to include a certain number of “affordable” housing units (however the locale defines that – typically less than 30% average median income (AMI)). IZ laws are separated into two basic categories: mandatory IZ requires all developers of certain types of units (typically multi-family) to include these units, while voluntary offers some kind of financial or development incentive. In theory, this encourages new development to “spread” some of the benefits to lower-income residents. Additionally, it allows state and local governments to bypass many of the difficulties of affordable housing development. 

On paper this sounds like a potentially great way to make housing more affordable. New affordable units are added to the local market, and the state doesn’t have to pay. The perfect combination for a local bureaucrat or elected official. This combination has proved to be a popular option for local governments. Additionally, in progressive communities in conservative states, IZ has been used to bypass state law that prohibits traditional affordable housing programs. Chapel Hill, NC has used IZ as a way to implement affordable housing policy without technically violating NC’s 1987 ban on rent control. 

In fact, inclusionary zoning has become so incredibly popular that a 2019 Urban Institute report suggests that at least 866 communities in the United States have some kind of inclusionary zoning ordinance, and this number is likely much higher in 2022. I even suggested in previous work that IZ could be a way to buffer the equity concerns around supply-side approaches to housing policy. I was misguided then, and IZ remains a deeply misguided policy solution for people who care about housing affordability. 

A tax on housing

The positive theory about IZ is largely driven by planning professionals who are not typically well-versed in economics. One of the top urban planning programs in America, the University of Southern California, still does not require economics classes as part of the core curriculum. The field is evolving and signs of hope exist as many urban planning schools begin more fully incorporating economics into their curriculum. However, the field is still heavily skewed towards top-down, government prescriptions to problem-solving. The field is also heavily skewed towards liberals and leftists and skeptical of markets. 

Additionally, many planners do not accept the basic economic premises as they relate to housing. Some deny that market “filtering” occurs where higher income households move out of older units which, in turn, become more affordable over time. Instead, many planners (and I have sat through many lectures discussing this) believe that the US housing market functions in segments. Real estate calls this a bifurcated market, specifically a bifurcation between low-income residents and high-income residents. The rich get richer, the poor get poorer. This explanation ignores the interconnectedness of “luxury” market-rate housing and affordable housing. When supply is constrained, for example, lower income households are forced to compete with higher income households for the same units. 

This discipline-specific knowledge gap, combined with a broader human problem with understanding unintended consequences, leads to the basic theory that inclusionary zoning would incentivize or mandate developers into building more affordable housing. However, economic theory suggests otherwise. IZ is a price control with a fancy name. 

In short, when you make it more expensive to do something, the likelihood of you doing that thing goes down. This basic dynamic acts as a tax on the development of new housing units. Combine that with other permitting requirements, environmental review requirements, and community input sessions and the costs to build any new housing quickly become astronomically high. High enough that developers might choose to build in the community next door. The housing units that are created are also not necessarily equal to market-rate housing in many ways. Affordable housing units are often subject to lotteries for rationing and the quality of the housing may be degraded. 

What does the data show?

The empirical data on the efficacy of inclusionary zoning is mixed and highly dependent on individual characteristics and local context. Ed Stringham and Tom Means find that between 1990 and 2000, California cities that implemented IZ policies had 20% higher housing prices and 7% fewer homes overall. Schuetz et. al. look at the Boston, the Bay Area, and San Francisco housing markets and find mixed results. In rapidly appreciating housing markets, IZ appeared to reduce supply and increase housing costs, but in depreciating markets, IZ appeared to accelerate the decline of housing prices. Emily Hamilton analyzes the Baltimore-Washington area and finds evidence to suggest that IZ increases market-rate housing prices but has no apparent effects on housing supply. Similar mixed, but not necessarily positive, results can be found in papers from Bento et. al. and Ann Hollingshead. 

The empirical data largely upholds traditional economic theory that IZ is a “tax” on housing. Additionally, IZ is not, in fact, “free” to the government the way planners often assume. Localities that implement such policies experience a decline in government revenue as artificially lower rents also lower the tax rate. This poses a problem to urban centers struggling to pay off debts and maintain existing services. Furthermore, the problems that plague communities with rent control policies also arise in communities with IZ policies. To reside in one of these rent controlled units, residents often have to enter a lottery. This planning approach poses serious problems though, including long waitlists and mismatches between residents and housing. 

What should cities do?

The political and policy opportunities for affordable housing by localities are restricted. States like North Carolina actively restrict the abilities of local authorities to implement their own policies, and communities often push back when cities try to upzone residential areas. Cities can, however, streamline permitting processes, reduce or eliminate “community input” sessions for development approvals, and maintain clear and simple regulations on developers. Inclusionary zoning has become a tool used by cities who perceive themselves as being constrained, but that shouldn’t be a reason to implement harmful policies. Cities need to lead the way in liberalizing America’s zoning and permitting regulations to ensure housing can be an abundant resource.