In addition to the effects that IZ may have on builders, consumers, and neighboring property owners and residents, IZ may have several effects on the jurisdictions adopting the IZ policy.
Discouraging Development
Within the Jurisdiction Adopting IZ
First, the adoption of an IZ policy could have the effect of discouraging development within the jurisdiction. Where IZ is mandatory (or is tied to zoning so restrictive that the IZ policy is functionally mandatory), the requirement operates as a tax on new residential development (Been, 1991; Clapp, 1981;
Ellickson, 1981). To avoid the tax, developers may choose not to build in the jurisdiction, or may choose to build either types of residential development not subject to the IZ or forms of nonresidential development rather than develop forms of housing subject to IZ (Been, 1991; Ihlanfeldt and Burge, 2006;
Schuetz, Meltzer, and Been, 2011). The extent to which a developer will build elsewhere or substitute other forms of development within the jurisdiction will depend on such factors as the relative elasticities of supply and demand for the various forms of development and the various jurisdictions (Been, 2005).
The elasticity of supply depends on such standard supply-side variables as physical or regulatory constraints on developable land and the relative cost of nonresidential development, including land costs, zoning, and the appropriateness of location (Clapp, 1981; Katz and Rosen, 1987). The elasticity of demand will depend on income and preferences of new households, particularly their willingness to pay to live in a particular jurisdiction (Dietderich, 1997).
Homebuyers may be more willing to pay the tax to live in areas with location-specific amenities or institutions (Ellickson, 1981). Moreover, the prevalence of IZ, other affordable housing production programs, and other land use regulations in neighboring jurisdictions will affect the ability of both developers and households to substitute away from jurisdictions with IZ (Been, 2005; Schuetz, Meltzer, and Been, 2011).
To the extent that competition from other forms of development or other jurisdictions discourages the development of residential housing in jurisdictions that impose IZ, the jurisdiction will
suffer a loss of any net benefits of development. These lost benefits include, for example, the value of the jobs and local purchasing created by development, the increased value of the property developed, and the value of increased availability of housing within the jurisdiction, minus any costs the development imposes.
The net cost a jurisdiction would bear if imposing IZ resulted in less development within the adopting jurisdiction depends on the housing market, the jurisdiction’s taxing and infrastructure finance systems, and many other factors. Quantifying the cost would be difficult because of that variation, but also because the empirical evidence on the effect of jurisdictional competition on development activity is mixed (Sterk, 1992). Furthermore, some evidence suggests that impact fees result in increased building activity in a jurisdiction by lowering opposition to the development (Burge and Ihlandfeldt, 2006; Ihlanfeldt and Burge, 2006). If IZ lowers opposition to market-rate development by addressing concerns opponents of that housing have about the jurisdiction’s need for affordable housing, it similarly might result in increased building activity (although it might also trigger opposition to affordable housing).
Effect on Tax Revenues
A jurisdiction imposing IZ might see several different effects on its tax revenues. First, to the extent that IZ raises the cost of market-rate housing—as some research suggests it might, at least in appreciating real estate markets (Knaap, Bento, and Lowe, 2008;
Schuetz, Meltzer, and Been, 2011)—jurisdictions may realize increased tax revenues because of the higher values of the housing. Those increased revenues may be offset, however, if IZ results in less market-rate development within the jurisdiction, as discussed previously. Furthermore, to the extent that developers avoid the tax IZ imposes, by passing the tax back to the landowner in the form of lower payments for the land, the jurisdiction may suffer some offsetting decrease in property tax revenue from the landowner (and possibly in decreased transfer taxes) (Ihlanfeldt and Shaughnessy, 2004).
IZ also might impose opportunity costs on the jurisdiction if the affordable IZ housing uses land that would otherwise have been developed for higher cost housing (and would, in turn, produce
greater property tax revenues for the jurisdiction). If the jurisdiction has sufficient other land available for higher cost housing, however, no such opportunity cost may arise.
Finally, to the extent that developers react to IZ by building in other jurisdictions, the local government may incur an opportunity cost in the foregone property tax revenue from the development, foregone sales tax revenue on goods and services associated with the development, and foregone income taxes on workers employed by the development or new residents who would have moved to the jurisdiction to live in the housing. Of course, not all jurisdictions receive sales or income tax revenue from activity within their borders; in those that do not, opportunity costs associated with development that moved to other jurisdictions will fall on higher levels of government, which may receive offsetting taxes from the development substituted elsewhere within their jurisdiction.
Effects on Infrastructure and Service Provision Costs
To the extent that either market-rate housing or affordable housing imposes more costs on the local government than it brings in tax revenues, those costs will increase if IZ results in more such housing or decrease if it results in less (as long as any substitute developments do not impose higher relative costs on the jurisdiction). Housing built pursuant to IZ may compel the jurisdiction to provide infrastructure such as roads, sewer systems, and school buildings and to provide services such as schooling, police and fire protection, and infrastructure maintenance.
Jurisdictions may pay for such infrastructure through impact or other fees imposed on development and for ongoing services by property taxes or user fees imposed on residents of the development. If development costs the jurisdiction more than it brings in through taxes or fees, however, IZ may increase a jurisdiction’s costs if it results in more building.
Effects on Other Costs
Administration of an IZ program likely will impose costs on the jurisdiction, which will have to hire administrators, inspectors, and enforcement officers to oversee the development of the IZ units, oversee the expenditure of any in-lieu fees, and possibly staff whatever system is used to market and
allocate the IZ units (although the developer may also assume that function).
Finally, to the extent that the structure of the IZ program triggers requirements (such as prevailing wage laws) that increase the costs of building affordable housing and that the local jurisdiction is helping to finance the affordable housing through bonds, LIHTC, or other financing mechanisms, those additional costs may reduce the funds available for other affordable housing projects.
Research Gaps
Too little is known about the extent to which land use regulations in general, or IZ in particular, affect the decisions developers make about whether, when, and what to build in a particular community.
In addition, few researchers have tried to quantify the effects IZ might have on local governments’ income or expenditures. Such assessments would be extremely difficult to generalize because of the tremendous variation among IZ programs and land use regulation schemes of different jurisdictions. Nevertheless, more attention to the effect of IZ programs on the adopting jurisdictions’ development patterns, tax receipts, and infrastructure and service outlays would be helpful.
V. Sustaining IZ Benefits
The primary goal of inclusionary zoning programs, as discussed in Section III, is to increase the availability of affordable housing units. Determining the number of units produced has long been part of the efforts to assess the effect of IZ. Although tracking how many units of affordable housing IZ programs have produced is important, knowing the number alone is insufficient for understanding the value IZ might offer for enhancing affordable housing opportunities and providing the other benefits attributed to IZ programs.
In addition to the count, examining the duration of affordability and factors that can affect duration is important. A review of relevant literature indicates that previous research has focused less on retention than on production of affordable housing units.
Research has documented affordability requirements and changes to them over time and sheds some light on the numbers of units lost, but no study has taken as its central purpose an examination of the retention of IZ-produced affordable housing units and the risks to retention. The literature does highlight issues to consider related to sustaining benefits, including a number of factors that can lead to unit loss and a variety of approaches to retaining affordability over time.