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No. 606

December 6, 2007

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The Planning Tax

The Case against

Regional Growth-Management Planning

by Randal O’Toole

Executive Summary

growth boundaries, adequate-public-facilities ordi-

Regional growth-management planning makes

nances, and growth limits all drive up the cost of

housing unaffordable and contributes to a busi-

housing by artificially restricting the amount of

ness-unfriendly environment that slows economic

land available or the number of permits granted

growth. The high housing prices caused by growth-

for home construction. On average, homebuyers in

management planning were an essential element of

2006 had to pay $130,000 more for every home

the housing bubble that has recently shaken our

sold in states with mandatory growth-manage-

economy: for the most part, this bubble was limit-

ment planning than they would have had to pay if

ed to urban regions with growth-management

home price-to-income ratios were less than 3. This

planning.

is, in effect, a planning tax that increases the costs of

In 2006, the price of a median home in the 10

retail, commercial, and industrial developments as

states that have passed laws requiring local gov-

well as housing.

ernments to do growth-management planning

The key to keeping housing affordable is the

was five times the median family income in those

presence of large amounts of relatively unregulat-

states. At that price, a median family devoting 31

ed vacant land that can be developed for housing

percent of its income (the maximum allowed for

and other purposes. The availability of such low-

FHA-insured loans) to a mortgage at 6 percent,

cost land encourages cities to keep housing

with a 10 percent down payment, could not pay

affordable within their boundaries. But when

off the mortgage on a median home in less than

state or other planning institutions allow cities to

59 years. In contrast, a median home in the 22

gain control over the rate of development or rural

states that have no growth-management laws or

areas, they lose this incentive, and housing quick-

institutions cost only 2.7 times the median fam-

ly becomes unaffordable. States with growth-

ily income. This meant a family could pay off a

management laws should repeal them, and other

home in just 12.5 years.

states should avoid passing them.

Growth-management tools such as urban-

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Randal O’Toole is a senior fellow with the Cato Institute and author of the new book The Best-Laid Plans: How

Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future.