The Flaws of 'Funded' Inclusionary Zoning

Taxing new housing will always reduce housing production.

Happy Tuesday, and welcome to another edition of Rent Free.

Thanks to traveling last week for a reporting trip, this week's newsletter is a little abbreviated.

The lead item focuses on efforts to "fund" inclusionary zoning mandates—i.e., to give developers subsidies to cover the costs of affordable units cities require them to include in their projects. I don't disagree that "funding" these public mandates is better than not funding them.

But inclusionary zoning, funded or unfunded, is still a sub-optimal policy with bad tradeoffs, for reasons I argue below. Instead of trying to fix inclusionary zoning, more cities and states should get rid of the policy altogether.

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'Funded' Inclusionary Zoning Still Reduces Housing Supply

In the research and in the discourse, Portland, Oregon, has provided the country with its main cautionary tale on the flaws of "inclusionary zoning."

Beginning in 2017, the city began enforcing a requirement that new apartments of 20 units or more include "affordable" housing units, which are rented at money-losing, below-market rates to lower-income tenants.

The results were predictable. Developers shrank the size of projects to avoid having to comply with the costly mandates. Overall, permitting fell.

To reinvigorate housing production, the city greatly expanded property tax breaks for projects subject to the affordability mandates.

By "funding" its inclusionary zoning mandate, developers said they were able to make more projects pencil. The share of apartments being built with 20-plus units increased, even as overall production remained depressed—arguably for other, cyclical reasons.

Currently, the Oregon Legislature is trying to expand on the Portland lesson with a bill that would likewise require some localities to "fund" their inclusionary zoning mandates.

On Friday, the Oregon Senate approved Senate Bill 1521, which would forbid cities and counties in the Portland metro area from requiring new construction come with affordable units unless the additional cost of those affordable units is fully offset by countervailing subsidies or tax breaks.

The vote received a lot of praise from YIMBY ("yes in my backyard") activists and commentators online who say that by "funding" inclusionary zoning, we're fixing the problems of the policy. As Matt Yglesias summarizes, unfunded inclusionary zoning is a regressive tax on the poor, while funded inclusionary zoning is social spending that helps the poor.

FUNDED inclusionary zoning is social spending to help low-income people.

UNFUNDED inclusionary zoning is a regressive tax on new housing. https://t.co/xbzKAIkHN0 https://t.co/T37Zw4kNmL

— Matthew Yglesias (@mattyglesias) February 22, 2026

It's certainly true that "funding" inclusionary zoning to offset developers' losses helps to mitigate the negative impact the policy has on new supply. It would also go a long way toward making inclusionary zoning constitutional. (Critics periodically argue in lawsuits that unfunded inclusionary zoning is an unconstitutional, uncompensated taking.)

Even so, there are still many problems with "funded" inclusionary zoning that make it an inferior policy to simply having no inclusionary zoning at all.

For starters, funded inclusionary zoning does not remove a regressive tax on housing. The tax, in the form of the mandated affordable units, is still in effect. It is just offset by a countervailing subsidy intended to prevent housing production from falling.

Funded inclusionary zoning thus still has a suppressive effect on overall housing supply that must be mitigated with government subsidies/tax breaks.

Instead of spending tax dollars on schools, police, or lowering tax rates, city hall must spend that money just to keep housing production flat. The tradeoff of funded inclusionary zoning then is no new housing and fewer public services (or higher taxes).

Proponents of inclusionary zoning would argue that's OK because funded inclusionary zoning still provides the public benefit of more subsidized housing in amenity-rich areas at lower per-unit cost than subsidizing 100 percent affordable housing projects.

To say it leaves housing supply stagnant is to miss the point, because the policy isn't intended to increase housing supply.

That argument could well be true. But it's also effectively the same argument one would make for unfunded inclusionary zoning: At any given level of public subsidization of housing, we should opt for lower housing production in exchange for a higher mix of subsidized units in prime locations.

This becomes clear if you start with the funding required for funded inclusionary zoning and work backward.

Imagine two cities.

The first spends $0 on tax breaks for home developers and has no inclusionary zoning. Imagine, then, that this city imposes an inclusionary zoning mandate for the first time. Predictably, the number of projects being built that are subject to the mandate falls, but not to zero. Less housing is built, but some mixed-income buildings are produced as a result of the mandate.

Now imagine a second city that gives builders of new housing tax breaks and has no inclusionary zoning. The city then imposes inclusionary zoning mandates for the first time. What's going to happen?

The same thing that happens in the first city! Some projects don't pencil under the mandates, less housing is built than before, but some mixed-income buildings are produced thanks to the mandates.

The second city might have started off with a higher rate of housing production because it was already giving developers tax breaks. With inclusionary zoning, its subsidies must go to counteracting the effects of affordability mandates, not expanding housing supply.

Fewer units would be built still if the second city adopted inclusionary zoning and eliminated its housing subsidies. But there's no world in which inclusionary zoning, funded or unfunded, doesn't cost a city some additional units.

Maybe one thinks the tradeoff of fewer overall units but more subsidized units in mixed-income areas is a worthy one. YIMBYs shouldn't.

A core insight of YIMBYism is that cities are unaffordable because the rate of home construction is constrained by regulation. The YIMBY policy program thus calls for removing regulatory constraints in order to boost housing supply and make cities affordable and accessible for everyone.

That YIMBY worldview would therefore seem to suggest that housing subsidy dollars should be spent expanding supply even more, not zeroing out the effects of supply-killing affordable housing mandates.

If a city has a housing shortage, boosting housing production, and not tinkering with the mix of incomes in new buildings, would seem to be the priority.

People who believe in government subsidies generally will argue that reducing production is an acceptable side effect of redistributing resources to people with the least.

Fair enough. That's a big debate we don't have to litigate here. The point is that inclusionary zoning does not put a roof over someone's head who wouldn't otherwise have it. The policy gives lower-income renters massively discounted rent to live in nicer, newer buildings.

That doesn't strike me as a pressing public priority. Indeed, it seems a little unfair that a person would pay half the rent of their neighbor for the exact same apartment, just because they happen to win the government lottery that assigns inclusionary zoning units.

To reiterate, Oregon will be better off for mitigating the supply-killing effects of inclusionary zoning with requirements that the policy come paired with subsidies of some kind. S.B. 1521 would be a directional improvement.

But Oregon would be better off still if it adopted the policy approach of Arizona or Texas, and just banned inclusionary zoning, period.

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Quick Links

• The movement to block new Immigration and Customs Enforcement detention facilities via local zoning laws grows, with Rep. Alexandria Ocasio-Cortez (D–New York) endorsing the maneuver.

Local zoning is the way! A lot of these are being stopped or stalled by neighborhood organizing.These warehouses often need to be purchased, permitted, approved for occupancy and specs. Each one of those steps can be interrupted.Ppl are pressuring corps not to sell, counties to deny permits, etc

— Alexandria Ocasio-Cortez (@aoc.bsky.social) 2026-02-22T18:33:42.314Z

• California YIMBY hosted a forum on housing policy with the state's Democratic gubernatorial candidates. My primary takeaway is that all the candidates, at a minimum, want to sound like housing-supply maximizing YIMBYs. In the rhetorical war over housing policy, the YIMBYs have won.

• A new paper out of Switzerland once again finds that building more housing, even if it's expensive housing, lowers housing costs for everyone through the magic of moving chains.

A common misunderstanding is that supplying expensive new housing does not help the poor.
No. Residents each move up a rung, freeing up housing at the bottom of the ladder.
The latest, of many, papers to show this uses great data from Switzerland. 1/3https://t.co/5NK74riQog pic.twitter.com/OSIgZHVtiw

— Peter Tulip (@peter_tulip) February 21, 2026

• The Massachusetts attorney general is suing nine cities for refusing to comply with a state law that requires localities to allow more housing near transit stops.
• Illinois Gov. J.D. Pritzker released a zoning reform plan last week that calls for allowing smaller, multi-unit developments on larger single-family lots.