Legislators in Colorado and Tennessee have introduced bills modeled on Arizona’s Private Property Rights Protection Act, a law that requires municipal governments to compensate landowners when new land use regulations make land less valuable. Both states already have areas with housing affordability problems due in part to land use regulations that are already on the books. Requiring local policymakers to compensate property owners for downzoning going forward won’t do anything to reduce existing barriers to housing construction, but they can at least help prevent the problem from getting worse. 

Though the Fifth and Fourteenth Amendments to the Constitution state that Americans must be compensated when private property is taken by the government, the Supreme Court has long held that state and municipal governments generally don’t have to compensate property owners when land use restrictions reduce their property values, even the rules eliminate nearly the entire value of the property in question. In 1926, the Supreme Court ruled in Euclid v. Ambler that local governments’ police powers, delegated to them by their states, give them the authority to restrict real estate development. The 1978 decision Penn Central v. New York further entrenched this authority. The Court found that land use restrictions are not takings requiring compensation for property owners so long as the property maintains any economic value at all. In Smyth v. Falmouth, the Court held that even a building permit denial that reduced a property’s value by 91% didn’t require the locality to compensate the owner.

Law professor Ilya Somin points out that it wasn’t always this way. The District Court that heard Euclid prior to the Supreme Court determined that local governments were required to compensate property owners for regulatory takings just as with eminent domain. Their opinion stated: 

The argument supporting this ordinance proceeds, it seems to me, both on a mistaken view of what is property and of what is police power. Property, generally speaking, defendant’s counsel concede, is protected against a taking without compensation, by the guaranties of the Ohio and United States Constitutions. But their view seems to be that so long as the owner remains clothed with the legal title thereto and is not ousted from the physical possession thereof, his property is not taken, no matter to what extent his right to use it is invaded or destroyed or its present or prospective value is depreciated. This is an erroneous view. The right to property, as used in the Constitution, has no such limited meaning. As has often been said is substance by the Supreme Court: ‘There can be no conception of property aside from its control and use, and upon its use depends its value.’

In overruling the District Court, the Supreme Court determined that zoning restrictions including single-family zoning was a valid use of police power. This has allowed local governments to consider the benefits of land use regulations, including rules limiting residential development to exclusively expensive single-family houses on large lots, without factoring in the cost that taking away the right to develop denser housing has for property owners. The wide authority states and localities have to implement land use restrictions without compensating property owners has created the conditions for housing supply constraints and affordability challenges that many parts of the U.S. are dealing with today. In an alternative world where the Court required localities to compensate property owners for the regulatory takings of zoning, local policymakers would have faced different incentives in implementing land use regulation. They would have had to weigh the benefits of restrictions on development against the cost of compensating property owners for taking away development rights, and reducing their property values, with tax dollars. This alternative world has existed in Arizona since voters approved the Private Property Rights Protection Act in 2006. The state law requires governments to compensate property owners for regulatory takings, such as implementing a new restriction on how a parcel of land can be used, and it has prevented several downzonings to date.

Since the Property Ownership Fairness Act passed, policymakers have rejected multiple proposals for downzoning after realizing that taking away property owners’ development rights would require large outlays. When Tucson neighbors called for a ban on housing construction near the University of Arizona that was affordable to students, policymakers determined that downzoning wouldn’t be worth the cost.

Elsewhere in the country, policymakers have repeatedly downzoned neighborhoods just when infill redevelopment becomes financially feasible. The DC Zoning Commission recently downzoned my neighborhood after developers began replacing rowhouses, duplexes, and fourplexes with larger stickplexes. At the same time, they upzoned a nearby commercial corridor, but it’s not yet clear how much new development will be feasible to build there. This follows the pattern of the Bloomberg Administration in New York, which downzoned many neighborhoods that were experiencing gradual infill redevelopment while upzoning smaller commercial corridor areas for higher density. Under a law like Arizona’s, upzoning would remain feasible, but downzoning would require difficult budgetary tradeoffs.

The Supreme Court’s finding that most land use restrictions are not takings has allowed local governments to set vast limits on the right to build housing, contributing to the widespread housing affordability challenges the U.S. faces today. The Private Property Rights Protection Act has proven to be a way to prevent further limits on housing construction by requiring policymakers to consider the costs of land use restrictions in addition to the benefits.

Edit: Thanks to Ilya Somin for two corrections to this post!