The Death Knell of "Inclusionary" Zoning
A legal fight could reshape housing policy nationwide for the better
In the small Californian city of East Palo Alto, a frustrated homeowner could hobble the way local governments throughout the country plan for low-income housing. In the process, they might transform how the housing movement thinks about policy making.
At issue is “inclusionary zoning,” laws that require private developers to set aside a percentage of homes in new development for low-income tenants or pay a fee.1 Inclusionary zoning intends to ensure that low-income residents can live in new developments, helping to create racially and economically integrated neighborhoods. The policy has become increasingly common, implemented by more than 1,000 local governments nationwide.
This is a story of how inclusionary zoning might die, why it needed reform, and what housing supporters can do to better promote low-income homes in cities that need them.
Cascading Court Chaos
It all begins with a lawsuit. A homeowner wants to build two new homes on one lot in East Palo Alto. To build the homes, East Palo Alto’s inclusionary zoning ordinance requires the homeowner to either set aside one of the units for low-income tenants or pay a $54,891 fee to the city’s affordable housing fund.
The homeowner sued, using new Supreme Court precedent to reject the premise of the fee.
Specifically, the lawsuit draws on a 2024 Supreme Court case, Sheetz vs El Dorado County. The Sheetz case challenges the basis of impact fees, fees that cities frequently charge new housing to cover the costs created by the development. Sheetz basically requires local governments to provide strong evidence that the fees they charge new development reflect actual costs created by the development.2 If cities don’t have sufficient evidence to demonstrate financial impact, their fees may be deemed unenforceable.
From the CalMatters story covering the lawsuit:
Now Yu [the East Palo Alto homeowner] and his legal team are asking a federal judge to apply that same rule to inclusionary zoning. For East Palo Alto’s program to pass constitutional muster, the city would have to show that the $54,891 fee or the requirement to set aside new units at a discount relates to and matches the cost that Yu’s development would impose upon the city.
Yu’s attorneys, represented by the libertarian Pacific Legal Foundation, argue that “new residential development doesn’t have an impact on housing affordability,” which would mean the inclusionary zoning fee is unconstitutional under Sheetz. They cite “A growing body of economic research [that] has indeed found that local market-rate development puts downward pressure on neighborhood and city-wide rents.”
This argument highlights a split in the housing movement, one with large implications for the future of housing affordability.
Is “inclusionary zoning” actually inclusionary?
On one side, supporters for inclusionary zoning argue it is an essential housing affordability strategy. Across the country, inclusionary zoning has produced hundreds of thousands of deed-restricted low-income homes, at no direct cost to the taxpayer. Inclusion is in the literal name. Who doesn’t want that?
On the other side, other housing advocates argue that inclusionary zoning has large unintended consequences which undermine its core intent. Broadly, they argue inclusionary zoning is a tax on new housing that reduces development feasibility. Because new housing—even expensive new market-rate housing—drives down overall rents, inclusionary zoning ultimately counteracts its own goals.
UCLA researcher Shane Phillips partnered with UC Berkeley’s Terner Center for Housing Innovation, an academic think tank, to study inclusionary zoning’s impact on the housing market. He found the policy has mixed results when applied to residential development.
Terner Center researcher and Substacker Darrell Owens (writing in his personal capacity) summarized the findings:
Inclusionary zoning is not an affordability policy, it's an integration policy that is constantly misused. Unfunded mandates can’t replace the hard work of taxing monied interests — chiefly landowners and wealthy residents, which includes all real estate holders as well as developers — to pay for public goods … We should subsidize our low-income housing by taxing landowners and the high incomes inflating housing costs, not tax what we lack, which is housing.
Movements should reevaluate their preferred policies more often
Many housing advocates and local governments have become enamored with the concept of inclusionary zoning. In my personal and professional capacity, I have advocated for inclusionary zoning policies, unaware of evidence of negative externalities.3
This reflects a common challenge in policymaking: Once a policy idea goes mainstream, it can take years or decades to course correct despite available evidence about its net impacts. Instead of reforming inclusionary zoning to make it more effective, housing advocates may be caught flatfooted if the Supreme Court forces a course correction from the bench. We’re due some self reflection.
From the beginning, inclusionary zoning for residential development is a conceptually weird approach to solve affordability and segregation. It proposes to make housing more affordable by taxing some housing to subsidize other housing. A subset of people get cheaper housing, but the majority end up paying more to cover the cost of the tax.
The legal justifications behind residential inclusionary zoning are also strange. California’s state Supreme Court, at least, has argued that inclusionary zoning isn’t a tax at all because it falls under the legitimate use of local jurisdictions’ zoning powers. Those powers allow cities to enact broad regulations in the name of promoting public health and safety. Under this definition, inclusionary zoning is a matter of public welfare.
However, the legal foundations underlying local residential zoning powers are themselves based on deep prejudice. The 1926 Supreme Court court case that legalized the strictest forms of residential zoning, Euclid v. Ambler, refers to apartments and the renters who live in them as parasites on single-family neighborhoods.
From this foundation, residential zoning is inherently exclusionary, even when that’s not the policy’s intent.4 Inclusionary zoning is like the highway planners who say they’ll solve traffic forever by adding just one more highway lane. Just one more zoning update bro, then zoning will be inclusive.
But more lanes can’t solve traffic, and more zoning can’t solve exclusion.
Outcomes over process
Yet the original intent behind inclusionary zoning—racially and socioeconomically integrated neighborhoods in which people of all incomes can afford to live—is as important as ever. American neighborhoods are just as racially segregated today as they were in the 1970s, reflecting 50+ years of abject housing policy failure. Artificially induced housing shortages in superstar metro areas have priced out entire socioeconomic brackets or pushed them into housing instability and homelessness.5
The first step toward better policy is rebranding. “Inclusionary zoning” has come to describe a set of policies that tax some housing to fund other housing. But a different, non-technical definition of inclusionary zoning could focus on having less residential zoning overall, which is inherently more inclusive.
Consider that over 75% of residential land in America exclusively allows single-family homes. No housing affordability or integration strategy can work long term if most neighborhoods ban most new development. We need inclusionary zoning policies that focus on gradually rolling back the layers of rules that prevent certain kinds of housing like duplexes, triplexes, small apartments—and the people most likely to live in that housing—from being built in many neighborhoods.
A second step would be re-conceptualizing those who build housing. In politics, trade groups like “developers” often get abstracted away into greedy archetypes backed by shadowy capital, with large reserves of cash the public can tap into if we just force them to share.
In reality, developers are human beings operating in a high-risk, high-reward industry that provides an essential human need, housing.6 Like all humans, developers respond to incentives. They’re amoral actors motivated by profit, but it’s impossible to make them build housing affordably by coercion alone.
Which leads to the last step: Housing advocates can pursue new strategies to effectively create integrated neighborhoods without the cost created by inclusionary zoning policies. The market alone won’t necessarily integrate neighborhoods, but leveraging the incentives that drive market-based decisions would help.
One approach: Local and state governments could offer voluntary incentives for developers to provide low-income housing. For example, cities could offer 15-year property tax breaks for homes within market-rate developments provided to low-income tenants at below-market rents.7 More simply, cities could offer direct subsidy, funded by property and income taxes on wealthier residents instead of the current system that relies on subsidies from future residents in new development. Either way, an incentive-based model would lead to more, higher-quality low-income housing by making building easier. It would flip the status quo mandates on their head to deliver better outcomes.
Rather than trying to fix broken residential zoning with more zoning, we can imagine something better.
Cities likely have some time to implement alternative low-income housing strategies beyond inclusionary zoning: Sheetz did not receive a final decision from the Supreme Court until 2024, seven years after it was first filed in superior court in 2017.
Still, the gears of city policy move slowly. Housing advocates and local governments can start planning now for inclusionary cities, communities where zoning reform, smart incentives, and sufficient subsidies for tenants in need deliver affordability at scale.
This article represents exclusively my own views, not those of any of my employers.
“Inclusionary zoning” sometimes also refers to policies that charge new commercial development a fee to fund affordable housing. Throughout this piece, I am exclusively referring to inclusionary zoning on residential development.
Also for clarity, “low-income” refers to housing that is rent controlled and available only to people earning below a certain income. The income level needed to qualify as “low income” varies by county and state.
For more on Sheetz, I enjoyed this National Law Review article.
Again, I am exclusively describing the impact of inclusionary zoning on residential development. Some inclusionary zoning policies also apply to commercial development, which I’m fine with. Commercial development has a more direct impact on housing prices and rents, so there’s a much stronger justification for taxing commercial growth to fund affordable housing.
I enjoyed this essay, All Zoning is Exclusionary, by Substacker Ryan Puzycki.
Economist and Substacker Kevin Erdmann writes powerfully about the absurdity of our supply shortage and the displacement it causes.
In a sense, developers are like farmers. Both professions are not really good or bad, just filled with amoral actors whose profit motive drives them to provide an essential human need. Both policies are also warped by government policy into delivering less healthy outcomes: Mono-cropped corn fueled by federal agricultural subsidies, mono-cropped single-family homes fueled by federal mortgage subsidies and state and local zoning laws. More on this extended simile for another piece!
The number of years is arbitrary; cities should adjust the number as needed to incentivize developers to provide different amounts of affordable housing at different rents as deemed necessary.
Great article, Jeremy!
interesting article, thanks for sharing