July 20, 2017

The Case for Preemption in Land-Use Regulation

Zoning and related land-use controls became common in American municipalities in the early 20th century, but these rules have constrained housing supply on a large scale only in recent decades. Today, several US cities have land-use regulations that account for at least 10 percent of housing costs. In San Francisco, land-use regulations account for half of home values. Zoning and other land-use rules are a barrier for people who wish to live in high-productivity cities, because they increase the cost of housing and reduce the benefits of relocation. Preemption by state governments of local land-use controls is justified to preserve the American system of competitive federalism.

The opportunity for residents to “vote with their feet” by choosing to live and work in the places where they can best pursue prosperity and happiness is essential to the American system of competitive federalism. When jurisdictions must compete with each other for residents and wealth, they tend to enact policies that support broad-based economic development. Absent this competitive pressure, policymakers are more likely to implement policies that privilege special interests because they face a diminished threat of their tax base’s leaving the state. Empirical research demonstrates that restrictive zoning rules reduce the rate at which people are moving from low-income, low-productivity states. The policies that protect homeowners from asset volatility come with the cost of shutting low-income people out of job opportunities.

Rules that limit housing development include minimum lot requirements, minimum setback, and height restrictions. Cities also mandate parking requirements and enforce historic preservation. Empirical studies have found that these regulations increase housing prices by making it more difficult for developers to build new housing where it is needed rather than in less desirable greenfield areas on the periphery of major cities.

Some states have implemented growth management rules on top of local zoning ordinances. For example, Oregon requires its municipalities to preserve green space around their borders, preventing development from expanding outward with population growth. State-level growth management rules interact with local-level limits on building density. Both types of rules make land less valuable by limiting what can be built on it. In turn, both types of rules drive home prices up by restricting supply.

These limits on housing development tend to be most binding in the country’s most productive cities with the greatest economic opportunities—precisely where additional housing supply is most valuable. The high cost of real estate in these otherwise desirable locations dampens the options for exit, the ability to move from one jurisdiction to another that presents a more favorable political or economic environment. Because land-use regulations put artificial supply constraints on housing, they limit opportunities for people to enter their preferred job market.

A home is often a household’s largest financial asset, so homeowners lobby in favor of policies they think will promote a stable real estate market. Because homeowners are more likely to vote and less likely to change jurisdictions, their preferences are a salient force in shaping policymakers’ behavior. Economist William Fischel describes homeowners as “homevoters” because of their outsize influence on shaping how much housing will be built near their assets. Incumbent policymakers face little incentive to create opportunities for new people to move into their jurisdictions because current residents can depose politicians, and the marginal increase of new voters that will come with land-use liberalization will do little to keep these politicians in office.

Although current limitations on real estate development may reflect the preferences of homevoters for their own neighborhoods, these land-use regulations have unseen victims in renters who must pay inflated prices for housing and, perhaps worse, people who choose to permanently live in low-productivity places because of prohibitive housing costs in more productive places. One empirical source estimates GDP lost to suboptimal worker location due to zoning regulations at $1.4 trillion annually.

Although states issue some land-use regulations, local governments are the primary source of restrictive, binding regulations that affect housing supply. At the local level, a policymaker may represent a constituency opposed to all growth, making the inefficiency of land-use policy a permanent feature. State-level policymakers have larger constituencies and are more likely to care about drags on regional growth. In addition, it is more difficult to write parcel-specific land-use controls at the state level. Pro-growth policies therefore may more likely be implemented at the state level because interests and legislation there tend to be more encompassing.

Land-use scholars have proposed various types of state-imposed “zoning budgets” for cities. These “budgets” would set hard limits on how restrictive local regulations can be. Economist Edward Glaeser has proposed that a historic preservation budget would force municipalities to make tradeoffs on which buildings are preserved. A state rule could put a cap on the number of individual buildings that cities can landmark for historic preservation. Legal scholars Roderick Hills and David Schleicher have proposed minimum requirements on the amount of new housing that cities must accommodate each year. They suggest that city mayors propose housing targets at the beginning of each year subject to city council approval. Under the zoning budget, new rules that would reduce the potential housing supply through downzoning in one part of the city would have to be offset with upzoning in another part of the city. Both types of preemption leave municipalities with broad authority over their regulatory environment but set a maximum level of restriction.

State-level preemption of local land-use rules has perhaps the strongest potential to reduce regulatory burdens on mobility, with a lower risk of increasing the total size of the administrative state. While local elected officials must answer to homeowners in a relatively small geographical area, state policymakers have a broader geographical constituency and are further removed from opposition to development at the local level. State rules that limit the extent to which local governments restrict development could increase housing supply and affordability in the country’s most productive cities.

Local governments that implement land-use regulations restrict housing supply, drive up housing costs, and reduce the potential for entry and exit across jurisdictions. By privileging homeowners, policymakers help ensure their continued stay in office. But the costs of land-use regulations are borne by people who are unable to move to opportunity and, ultimately, by everyone who suffers from lower innovation and economic growth relative to what a freer market could produce. Because land-use regulations interfere with the American system of competitive federalism that is designed to discipline policymakers, a strong case exists for preemption at the state level.