The United States faces a housing shortage of 3.7 million units, according to Freddie Mac's most recent estimate. Against that backdrop, more than 800 American cities have adopted "inclusionary zoning" — ordinances that require private developers to set aside a percentage of new housing units at below-market prices as a condition of building at all. The policy's appeal is intuitive: make developers create affordable housing, at no direct cost to taxpayers, and the problem solves itself. The reality, documented by researchers across the ideological spectrum, is that inclusionary zoning reliably reduces overall housing supply, raises market-rate prices, and produces an embarrassingly small number of affordable units in return. It is, in the language of economics, a tax on new construction — and like all taxes on production, it produces less of what we need most.
What Inclusionary Zoning Actually Is
Inclusionary zoning (IZ) policies were first implemented in Fairfax County, Virginia, in 1971. They now exist in more than 800 jurisdictions across the United States. Requirements vary: some mandate that 10% to 20% of units in new developments be rented or sold at below-market rates. Others are nominally voluntary, offering density bonuses — permission to build slightly more — in exchange for dedicating units to income-qualified households. In practice, where base zoning is already restrictive, "voluntary" programs are coercive in all but name. New York City's Mandatory Inclusionary Housing (MIH) program, launched in 2016, requires affordable set-asides for nearly all large residential developments that seek a zoning change — a requirement that, given how restrictive the baseline zoning is, applies to virtually every significant project in the city.
The mechanism of IZ looks superficially like a subsidy — but it is actually a mandate that forces one private party (the developer) to subsidize another (the below-market-rate tenant) as a precondition for engaging in an otherwise legal activity. Milton Friedman, who spent his career cataloguing the unintended consequences of exactly this kind of regulatory structure, would have recognized IZ immediately: a well-intentioned intervention that distorts price signals, discourages production, and ultimately leaves the intended beneficiaries worse off than a liberalized market would.
The Supply Effect: IZ as a Tax on Construction
Basic price theory predicts what happens when you impose an additional cost on producers: output falls and the cost is passed through to remaining consumers. IZ does precisely this. A developer who must rent 15% of a building's units at half the market rate must recover that lost revenue somewhere — either by raising prices on the market-rate units, by building a smaller project, or by not building at all.
The empirical evidence confirms the theory. A 2024 study from the UCLA Lewis Center for Regional Policy Studies, published by the Terner Center at UC Berkeley, modeled the effects of varying IZ requirements on housing production in Los Angeles. The findings were stark: completely eliminating IZ requirements in transit-eligible zones — while maintaining existing density bonuses — would yield approximately 398,800 homes over ten years. That is 38% more than would be built under the current 11% IZ requirement. Every additional percentage point of IZ requirement, the study found, reduces market-rate production by between 4,600 and 11,900 units. At a 17% IZ requirement, market-rate production is cut in half. At 20%, a mandate that would produce 50,000 below-market units would simultaneously eliminate more than 200,000 market-rate homes.
The California experience during the 1990s offers a natural experiment. A study cited by the Manhattan Institute found that California municipalities that adopted inclusionary zoning in that decade saw house prices rise 20% higher and total housing stock fall 7% below what comparable municipalities without IZ achieved over the same period — a period when demand was expanding rapidly. The cities that mandated affordability produced less housing and higher prices than those that did not.
In Portland, Oregon, the effect was visible in the project-size data: after the city's IZ ordinance applied to buildings of 20 units or more, new apartment projects just above the 20-unit threshold essentially disappeared, while projects of 19 units proliferated. This is a textbook response to a threshold tax — developers optimize around the trigger rather than build what the market needs.
The Output Problem: 27 Units Per Year
Even setting aside the supply-destruction effects, IZ programs produce remarkably little affordable housing in absolute terms. According to an analysis of IZ programs across the country, the average IZ program produces only 27 units of affordable housing per year. Across 800 programs, that amounts to roughly 21,600 units annually — a number that barely registers against a national housing deficit of 3.7 million and a household formation rate that outpaces total construction by hundreds of thousands per year.
San Francisco, one of the most aggressive IZ jurisdictions in the country, has accumulated approximately 5,000 inclusionary housing units over the life of its program — in a city where median home values exceed $1.2 million and housing unaffordability is among the most acute in the nation. Five thousand units, in a city of 870,000 people, over multiple decades, delivered at the cost of suppressing tens of thousands of additional market-rate units that would otherwise have been built. This is not a housing policy success. It is a monument to the difference between good intentions and effective outcomes.
The Price Pass-Through: Market-Rate Units Pay the Bill
Because IZ doesn't eliminate the cost of below-market units — it merely shifts who pays for them — those costs are absorbed by market-rate buyers and renters in the same development. NAHB research confirms that IZ requirements function as an additional tax on developers, who respond by constructing smaller buildings, charging higher prices on unrestricted units, or relocating projects to jurisdictions without mandates.
The Terner Center modeling found that even small increases in market rent — as little as 0.8% per year in additional rent growth — would be enough to completely negate the private subsidy value that IZ programs generate for low-income tenants. In other words, the inflation in market rents caused by reduced supply can erase the financial benefit to the very households IZ is designed to help. The policy robs Peter to pay Paul, but in the process drops enough money in transit that Paul ends up worse off.
Thomas Sowell's "Basic Economics" opens with the observation that economics is the study of the use of scarce resources which have alternative uses. Inclusionary zoning violates this principle at every turn: it treats developer capacity as a free resource to be commandeered, ignores the alternative uses of that capital (which include building more unrestricted units elsewhere or not at all), and assumes price controls on a subset of units will not affect behavior in the broader market. Every economic prediction that flows from this analysis has been borne out in the data.
The Perverse Incentive Structure
IZ creates a second-order problem that Hayek would have categorized as a knowledge problem: it gives affordable housing advocates a political reason to support policies that keep market-rate housing artificially scarce. If IZ benefits depend on base zoning remaining restrictive — because "voluntary" density bonuses are only valuable when base zoning denies that density — then the coalition that benefits from IZ has an institutional interest in keeping restrictive zoning in place. Advocates for IZ and advocates for exclusionary zoning end up, paradoxically, defending the same regulatory structure.
This helps explain why IZ has persisted and spread despite weak evidence of effectiveness. It provides visible, tangible benefits to a small number of below-market tenants (and politically valuable photo opportunities at ribbon-cuttings) while distributing its costs diffusely across all market-rate renters and would-be homebuyers — exactly the dynamic that public choice theory predicts will sustain bad policies indefinitely.
What Works Instead
The Terner Center study is explicit about the policy implication: "policymakers should focus on land use reforms to increase overall housing production" rather than relying on IZ mandates. This is the supply-side prescription that flows naturally from price theory and is confirmed by the empirical record. The elimination of exclusionary single-family zoning — which prohibits multifamily housing on roughly 75% of residential land in most American cities — would expand the supply of units across all price points far more effectively than IZ ever could. Cutting the regulatory compliance costs that add nearly $94,000 to every new home built would make construction financially viable in more markets, without requiring developers to cross-subsidize below-market units.
Where affordable housing subsidies are genuinely needed, directing them through the public budget — rather than commandeering private developer capacity — is both more transparent and more effective. A subsidy funded by general tax revenue distributes the cost broadly and allows policymakers to weigh it directly against alternatives. IZ hides that cost inside a regulatory mandate, where it is diffuse, invisible, and politically costless to impose — which is precisely why politicians favor it over more honest approaches.
The Policy Lesson
Inclusionary zoning is not a failure of implementation — it is a failure of economic logic. A policy that imposes a production tax on the one activity (market-rate construction) capable of expanding overall housing supply cannot, by design, produce more housing. It can only redistribute a shrinking pie while claiming credit for baking it.
The 800 cities that have adopted IZ have each run a version of the same experiment, and the results are consistent: fewer total units built, higher prices for market-rate renters, and a trickle of below-market units that vanishes against the scale of actual need. Against a national shortage of 3.7 million homes, producing 27 units per program per year is not a housing policy. It is the appearance of one.
The path to genuinely affordable housing runs through supply — liberalized zoning, reduced regulatory burden, and the freedom to build where demand exists. Policies that tax construction in the name of affordability are not reforms. They are the problem wearing a different name.
