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Inclusionary Zoning Acts as a Tax On Housing

Studies Show Alternatives More effective in Addressing Affordability Problems

March 6, 2008

Mandatory inclusionary zoning requiring builders to sell a certain number of homes at below-market prices is a complex market intervention that can act like a tax on housing and worsen the affordable housing problem it is meant to solve. But many alternatives to inclusionary zoning can successfully help meet the housing needs of low- and moderate-income families. These are the findings of three studies commissioned by the National Association of Home Builders (NAHB).

NAHB funded the research projects as part of its ongoing efforts to address the nation’s growing housing affordability problem. The three research projects are:

  • Abt Associates, of Cambridge, Mass., studied innovative state and local programs designed to address the housing affordability challenge and produced a 350-page compilation that explains how these strategies work, how they’re funded, where they’ve been used, and the advantages and disadvantages of each.
  • The University of Maryland (UMD) Center for Smart Growth conducted research on inclusionary zoning based on data from a large number of jurisdictions in California between 1988 and 2005. Having data for multiple jurisdictions over an extended period of time allowed UMD to investigate the impact of inclusionary zoning on housing production and prices while controlling for differences in market conditions.
  • The research on inclusionary zoning statutes and ordinances was conducted for NAHB by attorney Tim Hollister of Shipman and Goodwin in Hartford, Conn., and provides a national survey and perspective on the enabling authority and implementation details that underlie inclusionary zoning ordinances across the country. Hollister found that inclusionary zoning has more variables and potential consequences than drafters realize and must be considered carefully before adoption.

"The reality is that inclusionary zoning may not work at all in many markets, and may actually worsen the shortage of affordable housing in some markets," said Jerry Howard, NAHB’s executive vice president and CEO. "The research by Abt Associates demonstrates that there are many alternatives to inclusionary zoning that can have a far greater impact in meeting the housing needs of low- and moderate-income families."

All three reports can be found at www.nahb.org/housingaffordability.

The researchers at Abt Associates documented 30 detailed case studies that explain how state and local governments use a variety of strategies to address their housing affordability needs. This research represents the most comprehensive report ever compiled on the subject of non-federal solutions. Most of these case studies highlight new examples not previously described in other reports by such organizations as HUD, the Center for Housing Policy, and the Urban Land Institute.

The Abt Associates study found that local governments most successful in addressing affordability concerns have pursued a variety of strategies to encourage affordable housing, and that the strategies getting the most press have not necessarily been the most effective. The Abt Associates research identifies the programs that really can make a difference.

A good example is North Kingstown, R.I., which uses a variety of strategies, including state mandates and guidance for local planning, permit streamlining and a significant density bonus program for developers. Another example is Emeryville, Calif., which established zoning codes and development regulations to encourage infill and brownfields development, high-density housing and mixed-use development. Among the successes is Emeryville Warehouse Lofts, which includes 140 lofts, 129 other residential units, 7,000 square feet of retail space, a 4,500 square-foot landscaped courtyard and a renovated parking structure.

Inclusionary Zoning Acts Like a Tax

The University of Maryland (UMD) study fills a void in research into the long-term effectiveness of inclusionary zoning. The UMD study, conducted by Gerrit Knaap, Antonio Bento, and Scott Lowe, assessed the effects of inclusionary zoning policies on single-family home prices, single-family and multifamily housing starts, and the size of single-family housing units in a number of California jurisdictions from 1988 to 2005.

The study finds that in California between 1988 and 2005, imposing inclusionary zoning had virtually no effect on the overall level of housing starts, i.e. it neither increased nor reduced overall housing supply. However, the results showed measurable effects on other market factors. Inclusionary zoning:

  • Increased multifamily housing starts by 7 percent to 12 percent when production shifted away from single-family homes as inclusionary zoning requirements increased;
  • Raised the price of new homes by 2 percent to 3 percent, and by as much as 5 percent for more expensive homes, compared to communities without inclusionary zoning;
  • Reduced the size of new homes by 48 square feet.

The UMD report states that "no program, of course, is cost free. According to standard economic theory, inclusionary zoning acts like a tax on housing construction. And just like other taxes, the burdens of inclusionary zoning are passed on to housing consumers, housing producers, and landowners. More specifically, economic theory suggests that inclusionary zoning requirements act to decrease the supply of housing at every price, raise housing prices, and slow housing construction. As a result, inclusionary zoning policies could exacerbate the affordable housing problem that they are designed to address."

"Our report says little about whether inclusionary zoning is good or bad public policy," said Knaap, who is director of the National Center for Smart Growth Education. "It does make clear, however, that the benefits of inclusionary zoning are not without cost – and that those costs are borne primarily by the consumers and producers of new, market rate housing."

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