Incentivizing Housing Production: State Laws from Across the Country to Encourage or Require Municipal Action

Incentivizing Housing Production: State Laws from Across the Country to Encourage or Require Municipal Action

Incentivizing Housing Production has become a critical priority for state governments seeking to address the nationwide shortage of adequate and affordable dwellings. For decades, the United States has produced housing at a rate inadequate to account for population growth and wealth accumulation. This underproduction is national in nature, reducing housing affordability in communities across the country. Recent projections estimate that the U.S. is short millions of housing units, with certain states experiencing a particularly significant gap between the number of units needed and those actually being built. While factors like high construction costs and limited material availability contribute to this shortfall, local land use regulations, such as zoning policies, play an equally important role. These regulations shape the scale and location of new development, and in some cases, municipalities leverage local zoning to limit new construction. To counter these limitations, state governments are increasingly intervening. Incentivizing Housing Production through state-level legislation is now a primary mechanism to encourage or require changes in municipal land use policy, ensuring a fairer distribution and more adequate availability of homes.

The Methodology Behind Incentivizing Housing Production

To understand the breadth of state interventions, researchers from the Terner Center for Housing Innovation and the Urban Institute conducted a comprehensive analysis of state pro-housing laws. The methodology involved scanning published research and utilizing legal search engines to identify laws that require, encourage, permit, or prohibit local government action related to housing development. The study explicitly focused on state laws passed by legislatures and approved by governors, excluding unenacted legislation or purely municipal actions.
Through this rigorous process, the researchers identified 144 pro-housing laws across 20 states. They developed a detailed typology to categorize these laws based on three dimensions: the overarching purpose (functional goal and market segment), the type of policy lever employed, and the presence of any "escape hatches" or exemptions. This analytical framework is essential for understanding how different jurisdictions approach the complex challenge of incentivizing housing production at the local level.

Key Functional Goals and Market Segments

State laws designed to boost housing supply rarely have a single, isolated objective. Instead, they often target multiple functional goals and market segments simultaneously to maximize their impact on incentivizing housing production.

General and Affordable Housing Production

The most common functional goal identified in the research is the general expansion of housing supply, often coupled with a specific focus on affordable housing. For example, Washington’s SB 5287 (2021) updated the state’s Multi-Family Property Tax Exemption to incentivize new affordable housing development. It introduced a 20-year property tax exemption for qualifying projects, provided that at least 25 percent of units are sold to a qualified nonprofit or local government partner to guarantee permanent affordable homeownership for households earning 80 percent of the area median income or less.

Fair Housing and Sustainability

Beyond sheer volume, many laws aim to further fair housing by reducing discrimination and exclusion in housing markets. Washington’s HB 1220 (2021) amended the state’s Growth Management Act to require local governments to identify policies that result in racially disparate impacts, displacement, or exclusion, and to put forth policies to address these impacts. Similarly, sustainability and smart growth are frequent functional goals. Maryland’s SB 273/HB 294 (2009) updated statutory planning visions to ensure that growth is concentrated in existing population centers and that community design is compact, mixed-use, and located near transit options.

Targeting the "Missing Middle"

A significant market segment targeted by recent legislation is "missing middle" housing. This term refers to small-scale multifamily housing types, such as duplexes, triplexes, and townhouses, which bridge the gap between single-family homes and large apartment buildings. Oregon’s HB 2001 (2019) requires certain jurisdictions to allow a variety of these small multifamily housing types in areas that previously allowed only single-family dwellings, effectively legalizing missing middle development by right.

Five Policy Levers for Incentivizing Housing Production

The core of the state-level strategy relies on specific policy levers. The research categorizes these into five primary mechanisms that states use to drive local action and succeed in incentivizing housing production.

1. Planning Requirements

Plans refer to laws that require localities to identify and address the housing needs of their regions. Roughly half of the 144 laws reviewed included a component requiring municipalities to plan for housing needs. Oregon’s Housing Needs and Production Law (HB 2003, 2019), for instance, requires the state to collaborate with localities to calculate regional housing needs, estimate shortages, and project the number of units needed to accommodate population growth over the next 20 years.

2. State Standards

State standards limit localities’ authority over certain aspects of land use decision-making by setting a baseline or "floor" for municipal policy. For example, California’s AB 2011 (2022) requires ministerial approval—meaning administrative review without discretionary review or public hearings—for residential projects in commercial zones that include 100 percent affordable units. This removes local discretion that often stalls development and is vital for incentivizing housing production efficiently.

3. Carrots (Incentives)

Carrots are financial or regulatory rewards offered to municipalities that comply with state housing goals or exceed production targets. Massachusetts’s Chapter 40R (2004) encourages cities to create dense residential or mixed-use districts near transit. Once a municipality establishes this overlay district and it is approved by the state, the city becomes eligible for Smart Growth Housing Trust Fund investments, providing a direct financial incentive for denser development.

4. Sticks (Penalties)

Sticks refer to laws that allow the state to impose penalties on municipalities for noncompliance with housing regulations. While this was the least common policy lever in the database, it remains a powerful tool. Penalties can include levying fines, withholding state funds, or granting developers a "builder’s remedy," which allows developers to override local zoning rules if a jurisdiction is found to be noncompliant with state housing mandates.

5. Escape Hatches

Finally, many state laws include escape hatches, which are provisions that exempt certain jurisdictions from following elements of the law under specific conditions. For example, a state might exempt municipalities with fewer than 10,000 inhabitants from strict density requirements, or allow a municipal government to override a policy with a supermajority council vote. These exemptions are often necessary to secure the political consensus required to pass broad state-level legislation aimed at incentivizing housing production.

Authoritative External Resources for Further Reading

To deepen your understanding of the technical concepts and policy frameworks discussed in this analysis, the following authoritative resources are recommended:
  1. Ministerial Approval (By-Right Development): A streamlined permitting process where projects that meet objective zoning standards are approved administratively, without discretionary review or public hearings.
  2. Missing Middle Housing: A range of multi-unit or clustered housing types compatible in scale with single-family homes, vital for diversifying neighborhood housing options.
  3. Density Bonuses: A zoning incentive that permits developers to build a higher number of units than normally allowed by the zoning code, typically in exchange for including a percentage of affordable housing units.
  4. Builder’s Remedy: A legal provision that allows developers to bypass local zoning restrictions and build higher-density or affordable housing projects if a municipality fails to maintain a certified, compliant housing element.

Conclusion

The challenge of expanding the national housing supply cannot be solved by local governments alone, especially when local incentives are misaligned with regional needs. Incentivizing Housing Production through state-level intervention has emerged as a vital strategy to overcome jurisdictional fragmentation and exclusionary zoning practices. By utilizing a diverse toolkit of planning requirements, state standards, carrots, sticks, and carefully calibrated escape hatches, states can effectively guide municipalities toward more equitable and sustainable development patterns. The ongoing value of this comprehensive typology lies in its ability to provide policymakers, researchers, and advocates with a clear roadmap of proven legislative strategies. As the housing affordability crisis continues to evolve, the continued refinement and application of these state-level frameworks will be essential for ensuring that all communities have access to safe, stable, and genuinely affordable homes.

Also read: Affordable And Sustainable Housing: A Systematic Review Of Global Evidence, Equity Gaps, And Policy Pathways