Photo by Flickr user Nick Normal, CC BY-NC-ND 2.0
In my conversations with housing advocates in Texas, there’s a refrain I’ve heard repeatedly when mandatory inclusionary zoning, or IZ, ordinances come up. It goes something like this: “Alas, the Texas State Legislature passed legislation in 2005 that categorically prohibits our cities from enacting such a policy.” At this point, the person speaking trails off and gazes wistfully off into the middle distance. The unspoken implication is, “Forget it, Jake, it’s Texas, where pro-affordability ideas go to die.”
In traditional IZ, developers are required to set aside a given percentage of new unsubsidized housing units for below-market rents or sales prices—or (in some cases) pay a fee to avoid doing so. While IZ ordinances vary from city to city, all aim to increase the supply of newly built affordable housing.
But what if there is another way to achieve some of the same goals?
I will freely admit that what I am proposing here does not, to my knowledge, exist. One might dismiss it as nothing more than a budgeting gimmick, which I will also freely admit is accurate. But it is a budgeting gimmick that could potentially do a lot of the good that mandatory IZ promises, while also avoiding some of the harms that such policies can cause. For the sake of this trial balloon, I am going to call this hypothetical policy synthetic inclusionary zoning or synthetic IZ.
Synthetic IZ is inspired by something smart that Austin, where I live, already does. Like many cities, Austin has a Housing Trust Fund (HTF), which it established around the turn of the 21st century. To create a steady funding source to help fill the HTF’s coffers, Austin adopted a policy in which the city’s share of property taxes on land once owned by the city is funneled into the HTF. (Note that the city’s share of property taxes is roughly one-quarter, with most of the rest going to the schools. School funding is not affected by this policy or my proposal.) At first, 40 percent of such property tax receipts were dedicated to the HTF; in 2016, as Austin’s housing crisis intensified, the city council bumped it up to the full 100 percent.
The idea behind synthetic IZ is simple. Why not simply extend Austin’s property tax diversion policy for formerly city-owned land to cover all new housing development? To limit the shock to the city’s finances, you would want this reallocation of property taxes to only apply to the amount the assessed value on a given parcel increased after the new housing development was built—known as the increment. (With formerly city-owned land, this issue doesn’t exist because the city owed zero property taxes on properties it owned before it sold them to private parties.)
You would also only want to capture part of these new revenues. Some should be devoted to meeting the expanded need for municipal services and infrastructure that the new housing generates. Let’s say you dedicate 30 percent of the increment to the HTF for new construction. This is at the aggressive end of the spectrum of set-aside shares you see in traditional IZ ordinances around the U.S.
Under these parameters, very roughly speaking, how much money could we be talking about? Let’s do a crude back-of-the-envelope estimate. In 2019, the last full pre-pandemic year, the city of Austin issued about 16,000 occupancy permits for newly completed housing units. Let’s conservatively assume that on average each of these units added $200K in assessed taxable value to its parcel. At Austin’s current property tax rate of 0.514 percent, synthetic IZ with a 30 percent share would bring a little over $5 million per year into the Housing Trust Fund.
Will $5 million in new HTF funds eradicate housing insecurity in Austin? Certainly not. Importantly, though, the inflows into the HTF will grow with each passing year. If development continues at the exact same pace—admittedly an unlikely assumption in the real world, but just for the sake of argument—in a decade the synthetic IZ policy will be raking in over $50 million per year, deposited into the Housing Trust Fund.
By way of comparison, in 2018 Austin’s voters passed a widely—and in my view, justifiably—celebrated $250 million housing bond that exceeded the previously largest ever such bond over fourfold, and that is intended to last for six years. So within a decade the synthetic IZ policy could exceed the 2018 bond’s level of annual funding while operating essentially on autopilot. No voter approval needed. Affordable housing could have a guaranteed, automatic source of funding that grows over time and that could be counted on for the long haul. In other words, synthetic IZ, in an ideal scenario, could raise resources at the scale needed to put a real dent into the affordable housing shortage in a place like Austin.
How does this compare to traditional IZ? Analyzing the regions of the U.S. in which IZ has been applied the longest and in the most jurisdictions, Lance Freeman of Columbia University and Jenny Schuetz of the Brookings Institution found in a 2017 paper that it has yielded affordable housing production within these regions equivalent to just 0.1 percent of their total housing stock. They also found that New York City’s 421-a tax abatement was producing affordable units at 10 times the pace of its IZ program.
Every bit helps in attacking a problem as entrenched as housing unaffordability, so I am not here to dismiss or disparage what existing traditional IZ programs have accomplished—clearly every affordable unit produced is a benefit, in some cases a life-altering one, for the household that lives in it. I’m personally not swayed by purist arguments against IZ. But I would argue strongly that it is worthwhile to raise questions as to whether IZ is worth its undeniable drawbacks, or whether other courses of action might be more fruitful.
This is particularly true in Texas and the six other states that currently prohibit traditional IZ, where undoing the prohibition on IZ would require that pro-housing activists expend valuable time, effort, and political capital on lobbying a wary-to-hostile state legislature to pass a policy that might not, in the end, accomplish all that much.
Other Advantages of “Synthetic IZ”
In addition to keeping Austin or other red state cities like it out of hot water with their state legislatures, synthetic IZ would have other advantages over traditional IZ. For starters, whereas traditional IZ ordinances typically exempt whole categories of development types, such as solitary single-family houses or multifamily developments with fewer than a certain threshold number of units (20 in the case of Portland), synthetic IZ could cover all residential development—single-family, multifamily, accessory dwelling units, and possibly even home renovations and additions for which permits have been obtained. This would avoid one of the perversities of most traditional IZ policies, in which housing developments that at least obliquely help to ease housing shortages, such as market-rate rental apartments, bear the de facto tax of IZ, whereas a form of infill development, a single-family house, that very often simply replaces a small unit with another (much larger and more expensive) unit, escapes IZ altogether. In addition, synthetic IZ could be made even more potent by encompassing new nonresidential projects that increase housing demand, i.e., hotel, industrial, office, and retail developments.
What’s more, traditional IZ policies are conceptually and administratively complex. It is a delicate task for policymakers to “tune” an IZ policy so that it is aggressive enough to be worthwhile but not so aggressive that it squelches unsubsidized housing production altogether. This balance is even trickier to achieve given that market conditions vary drastically from neighborhood to neighborhood within any given city, and since overall macroeconomic housing market conditions fluctuate unpredictably over time. In short, it is tough to get an IZ policy right, and even harder to summon the will to appropriately amend it once conditions change.
Traditional IZ can create headaches for developers and the residents of below-market rate units, particularly for high-end buildings where below-market rate homeowners may be at odds with their market-rate neighbors if the latter, for instance, vote to raise condo fees to pay for expensive onsite amenities.
Synthetic IZ avoids these headaches—it requires little more than some simple calculations on the part of city staff, and it generates funds for the HTF that can be used to address whatever affordable housing needs the city deems to be most pressing. If integration of housing at different price or rent levels—a common justification for traditional IZ—is important, then the city can require that synthetic IZ funds be spent on affordable housing located within the geographic unit (such as an officially designated neighborhood, or City Council district) from which they were collected.
Synthetic IZ would be practical even in small cities without much staff capacity. The local government shuffles its own money around, rather than enacting a complex program that must be applied to development proposals and then enforced to assure compliance with the below-market requirements for new units over time. And a synthetic IZ policy is not going to inadvertently torpedo badly needed multifamily development, as may have happened recently in Portland. Instead, synthetic IZ ensures that more rapid growth in the city’s housing stock or housing prices translates into larger amounts of money over time, year after year, that will be needed to bake some degree of social inclusiveness, in the form of money for deed-restricted affordable housing, into that growth.
Some will object that synthetic IZ lets developers and landowners off the hook and relieves them of having to contribute to onsite affordable housing. However, the benefit of onsite affordable housing produced under traditional IZ is offset by reduced land values on potentially developable parcels, which in turn depress property tax revenues collected citywide that could otherwise support affordable housing. This is a problem avoided with synthetic IZ. If a city chooses to adopt a policy of negotiating for public benefits in exchange for an upzoning—a good idea in my view—then with a synthetic IZ policy in place it is relieved of having to negotiate with developers for onsite affordable housing and can instead bargain hard for open space, public facilities, upgraded infrastructure, and other community needs. These non-housing benefits could in many cases be more meaningful to wary neighbors than the incorporation of affordable housing into the development and could help blunt opposition to needed housing development.
Others will object that if enacted as a rigid policy (ideally in a city’s charter), synthetic IZ hamstrings a city council’s ability to make tough decisions about how to allocate new tax revenues among competing priorities such as those mentioned above. But the inescapable fact is that to make any meaningful headway against an intensifying shortage of affordable housing in cities like Austin, municipalities must get used to putting a lot more locally generated dollars into affordable housing than their voters have been accustomed to. This will be true whether the increased federal housing spending in the Build Back Better bill (under negotiation in Congress at the time of writing) ends up materializing.
Cities can’t wait for the cavalry from Washington, D.C., to solve their housing problems; they are going to have to do it themselves, both by making it a whole lot easier to build housing and by devoting a lot more dollars to below market housing. Synthetic IZ may be a budgeting sleight of hand, but it accomplishes the latter while harnessing the former in the direction of social equity. And it has the great advantage that it can be implemented today in any city, even in Texas.
This blog post incorporates findings presented by University of Michigan Ph.D. candidate Naganika Sanga at the Association of Collegiate Schools of Planning conference in October 2021.
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