Auctioning the Upzone: A New Strategy to Induce Local Government Compliance with State Housing Policies

Abstract

This white paper proposes a new tool — the development-rights auction — for inducing local governments to comply with state policies favoring high-density housing near transit and job centers. Local governments that rezone pursuant to state law would be permitted to auction, and thus profit from, the newly created buildable space. Winning bidders would acquire tradable “development allowances,” similar to the emissions allowances that are now bought and sold under California’s cap-and-trade regime for greenhouse gas emissions. Just as the owner of a power plant who wishes to burn fossil fuels must purchase emissions allowances for the carbon dioxide that would be released, so too would a landowner who wishes build in the expanded zoning envelope have to acquire and redeem development allowances. The new, state-conferred prerogative of local governments to auction development rights in areas the state wants upzoned would foster compliance with state policy through several channels. First, local governments would have a fiscal incentive to allow dense new housing in the targeted areas, and to streamline what are now cumbersome and discretionary permitting procedures. Second, the price at which development allowances trade (relative to the price of finished housing) would provide state oversight agencies with a valuable, forward-looking signal about the existence of hidden local barriers to the development of nominally-permitted housing. The right to auction development allowances would also give the most supplied-constrained cities a political incentive to support state-directed upzoning, and would bury the argument that state upzoning bills amount to giveaways to developers. Though there is some question about the constitutionality of the model, we conclude that U.S. and state constitutional challenges would probably fail.