Minneapolis Neighborhood with 4plexes

Inclusionary Zoning: Understandable Politics, Terrible Policy

Inclusionary zoning–a local government mandate that some new developments set aside some housing units at an “affordable” price point–is being discussed in Minnesota. Several Minneapolis council members have been supportive of an inclusionary zoning ordinance, and the council gave notice at the end of last year that they’re studying inclusionary zoning with an eye towards adopting a policy.

Although inclusionary zoning is often discussed as a question of zoning and housing, it’s really one of social policy or welfare. The problem we’re trying to solve is that some people’s incomes are insufficient to pay for a decent minimum standard of life’s basics of shelter, food, and clothing. There are several ways to address that problem of income falling short of expenses on the basics

  1. Give people more money (or “near money”, such as food stamps)
  2. Give people the things they need (food banks, school lunches, government owned housing)
  3. Regulate the prices people pay for the necessities of life.
Building more housing is another policy to expand supply and provide housing. (Glendale Townhomes, Minneapolis)

Government built and owned housing is one way to meet the need for affordable housing (Glendale Townhomes, Minneapolis)

In meeting people’s needs for food and clothing our social policies rely on a combination of the first two strategies—we give people things and we give people money. Giving people money and giving people access to things (houses) is also an important part of meeting the need for housing at affordable prices. In housing the money is often given in the form of vouchers that can only be used for housing, or the payment is made in some way directly to a person who owns the property being leased or rented to a person with a lower income. American programs to meet housing needs are financed by a range of federal and state taxes, and then complicated further by county or municipal administration. The continued need for more affordable housing might suggest we need to look beyond existing programs and add new policy tools such as inclusionary zoning. A big problem like housing affordability surely needs many policies directed at it, one might argue. Yet a more effective principle in public policy is to find the programs that work, and expand those.

Stone Arch Apartments

Affordable housing financed through the federal tax code.

The existing programs, despite their flaws, complications, and insufficient scale to meet everyone’s needs, have some virtues. Financed through federal and state taxation, they adhere to some important principles of how to pay for and organize social support.

  1. Government-provided social support should be financed by a broad cross-section of the community.
  2. The financing and provision of social support should be transparent. It shouldn’t be too hard to tell who is paying and who is benefiting.
  3. Government’s capacity to act should be independent of the timing and fluctuations of private decisions: if as a society we want to provide more help to the less fortunate we should vote to do do, tax ourselves, and distribute the money.
  4. We should set taxes to pay for social support in a way that doesn’t discourage the taxed population from doing things that are otherwise good for society

Inclusionary zoning fails many of these principles. It has a laudable goal: to help the less fortunate in society have decent housing. But if the goal is laudable, we should campaign for the most effective policies to meet it.

First, inclusionary zoning is often not financed by a broad cross section of the community. Indeed, it’s hard to think of a way to fund social welfare that is more narrowly designed. If we randomly selected a few hundred unlucky people in our cities to pay extra taxes to support public housing, that would be more unfair, but only slightly more. Inclusionary zoning policies vary considerably, but the basic design is that a percentage of units in multi-family developments must be provided at affordable rents.

In the worst form of inclusionary zoning policy the developer and the owners or renters of the other units have to make up the difference between the break-even on the inclusionary unit(s) and the affordable rent. In so doing, we are asking a small number of people who happen to be building or buying now or renting in new construction to fund our housing policy. Existing home-owners are entirely exempt from helping to pay.

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New housing just over the St. Paul/Minneapolis border. Inclusionary zoning will tend to push development into cities without these extra costs.

The politics are understandable: looking forward the cost of the policy will be borne by some combination of developers and people living in hypothetical unbuilt multi-unit buildings. This has an obvious appeal to existing homeowners or people happy with their current situation who don’t think they’re going to move, and thus don’t think they will have to pay. The costs of it are not even clearly perceived by current renters looking to buy or move sometime soon, because right now you don’t know if in the future you’ll move into a building subject to the policy.

In some versions of the policy, cities make up the difference between the developer or owners’ break-even and the affordable rent. This is much more transparent and can be seen in city budgets. But if we think about this in the context of a metropolitan area with many different municipal governments the problems abound. Why should renters or owners in one city be mandated to support the costs of housing provision when their neighbors across the border pay less? If we are going to support people meeting their housing costs we should do so at a state or federal level.

Secondly, the financing of inclusionary zoning is often opaque. An inclusionary zoning policy that is financed out of city taxes still fails to spread the costs of social support across a broader community, but is at least transparent in a public budget. Inclusionary zoning that mandates a proportion of units be affordable without compensation from the city pushes the costs of housing support onto developers and residents of apartment buildings.

The politics here are understandable if undesirable. Developers of new multi-unit buildings are seen by many homeowners as making large profits. The residents of new apartments and condominiums are similarly seen as well-off given listed prices for new construction. Why not, from this perspective, have the city capture some of the developers’ profit and some of the well-off residents’ income to finance a few units for people on lower incomes? The precise division of the burden between developers and market-rate residents will depend on whose choices are more or less responsive to prices. If residents really want to live in a particular new building without much concern for the price, they will take more of the burden of paying for the mandate. On the contrary, if residents are flexible but developers really want to build in a particular city despite the inclusionary zoning ordinance, then developers will bear more of the cost. But none of this is clear in the way that it would be if the city announced it was raising property taxes x% to devote y million dollars to supporting housing affordability.

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Does “luxury” mean the developer and residents have extra money to support affordable units?

Third, inclusionary zoning is a passive response to the problem of housing affordability. In most forms of inclusionary zoning policy, cities require that proposed developments include a certain proportion of affordable units. The policies don’t in themselves call any new housing into being, any units that are created are just a fraction of what private developers have decided to build. When you think about it, this is a little strange.

We don’t observe local governments requiring that upmarket supermarkets give 10% of what they sell at reduced prices to poor people. It would be a little strange if the amount of food we provided to the poor fluctuated with the demand for fancy dinners at downtown restaurants. Macy’s is not required by law to give five poor people overalls for every 100 suits they sell. Those policies would be the functional equivalent of inclusionary zoning for food and clothing. If it sounds absurd, perhaps it’s worth pondering why, and whether housing is really so different.

We don't require new supermarkets to give a certain proportion of food away at lower prices.

We don’t require new supermarkets to give a certain proportion of food away at lower prices.

Inclusionary zoning policies in many cities only apply to construction of larger buildings, with a typical threshold of 5 or 10 units before being subject to the policy. On the one hand, this will tend to discourage construction of larger multi-unit buildings, perhaps a politically appealing aspect of the policy. On the other, it holds the amount of housing affordability support hostage to the decisions of private developers about what they are going to build, and adds another layer of complexity to the zoning code.

Finally, inclusionary zoning policies discourage the construction of new market-rate housing. Inclusionary zoning is basically a tax on the construction of new market-rate housing. Proponents understandably don’t want to describe it as a tax, but a tax it is. Unless the city is funding the difference between the break-even and the affordable price from general taxation, inclusionary zoning is a tax on new construction.

Less new housing will be built if new housing is taxed, unless developers and potential residents are totally indifferent to the increased costs of market-rate housing. And indeed that is what research about the effects of inclusionary zoning has found: that it has increased the costs of housing and reduced the rate of construction, surely not what is desired. There are important urban-form implications here as well. If some cities mandate inclusionary zoning and others don’t, new development will be more likely to occur in the cities without inclusionary zoning. These shifts are unlikely to be easily discerned by policy makers who won’t see the developments that aren’t proposed because they are no longer profitable, and won’t see that a project is now being planned across the border.

The politics of inclusionary zoning are understandable. It sounds like policymakers are doing something about ensuring housing affordability. But the evidence is clear that inclusionary housing provides a tiny number of units relative to need, at best has no impact on overall housing prices while sometimes increasing them, discourages new construction, and comes with significant administrative and transaction costs.

Housing affordability is a problem, and one of the main causes is exclusionary zoning that makes it hard for new housing to be built. While the impact of zoning in Minneapolis on housing affordability is smaller than in Manhattan or San Francisco, there are many reforms that would improve affordable housing supply with modest impacts. Minimum parking requirements could be removed from all residences across the city, continuing the policy reform begun in 2015 that removed minimum parking requirements in larger buildings near high frequency transit (but not near the University of Minnesota).

2-6 unit buildings co-exist well with single family homes.

2-6 unit buildings co-exist well with single family homes.

R1 zones could be changed en masse to R2 to allow renewed construction of duplexes and fourplexes that make good neighbors with single family homes throughout the city, yet house eight to twelve people on the same amount of land as a single family house with two to five residents. Inclusionary zoning sounds nice, because who doesn’t love inclusion, but we should pursue more effective policies to deal with such important issues.

Evan Roberts

About Evan Roberts

Evan Roberts is an Assistant Professor of Population Studies and the History of Medicine at the University of Minnesota, where he teaches and researches demography, labor and urban issues. He counts it as a successful week if he has run more miles than he has driven. Connect on twitter @evanrobertsnz or now Mastodon @evanrobertsnz@econtwitter.net