Cities and states have passed roughly 225 pro-housing bills since 2023 responding to the COVID-19 pandemic boom.
According to Realtor.com, the housing reform conversation centered around one big idea: legalize more homes.
Research from the Mercatus Center showed that the legal efforts resulted in rewritten zoning maps, loosened density rules, and clearing the bureaucratic brush that slows construction.
Its a simple idea, Realtor.com said. If you allow more housing, supply will follow. But the promise of more housing has hit a wall, Realtor.com said.
In October, new construction reached its slowest pace since, underlining the fact that while legality may have been the first hurdle to building new homes, it wasn’t the last.
Realtor.com said that what remains is a complicated calculus to determine which projects are doable financially.
You might say it’s the missing link in today’s pro-housing playbook, according to Realtor.com.
The website said that while zoning can open the door, tax policy decides whether anyone walks through it. It said that until tax systems stop penalizing housing production, many of the nation’s biggest land-use wins could be victories on paper only.
Few Cities and States Have Examined Their Tax Systems
“Legal” isn’t the same as “feasible,” the website said.
Cities and states have taken hard looks at their zoning laws, but few have examined whether their tax systems support or sabotage new housing construction, Realtor.com said.
“I tend to think of land use as being about determining what’s legal, and then tax policy determines what’s feasible,” said Solomon Greene, Executive Director of land and communities at the Lincoln Institute of Land Policy.
“Tax policy always goes hand in hand with zoning and land use in terms of shaping housing supply,” Greene said. “How much tax is collected and when it is collected on land, and its improvements really determine what gets built and whether deals can pencil out.”
It affects every stage of development.
If taxes are due early in the process—before construction even begins, it ties up funding longer, increasing risk. That risk isn’t evenly shared, Realtor.com said. Some tax structures shift more of the uncertainty onto the developer, while others make long-term projects more viable.
The system ultimately influences what projects move forward, what types of homes get built, and who is willing to finance them, the website said.
Tax Policy Affects Everybody
“I would argue that while we’ve seen a lot of momentum around easing land use regulations, streamlining permitting processes to enable more housing to get built, we’ve seen less attention to sound tax policy reforms and evidence-based tax policy reforms that will enable those deals pencil out,” Greene said.
It’s not just affecting large developers. Small landlords and homeowners feel it, too. Whether you’re trying to build, renovate, or simply stay in your home, the rules of what’s taxed and when can make all the difference, Realtor.com notes.
The website said that to understand that ripple effect, it’s helpful to first understand the major tax levers that federal, state, and local governments can pull to help make the math more forgiving for construction.
At the federal level, Greene pointed to the Low-Income Housing Tax Credit (LIHTC) as the most effective tool for producing new affordable housing. It allocates about $10.5 billion in annual tax credits to support the acquisition, rehabilitation, or construction of rental housing for lower-income households.
It makes housing viable by reducing long-term tax liability and improving the return profile for investors. LIHTC finances about 90% of all new income-restricted rental housing built in the United States.
Realtor.com said that other federal incentives are less targeted, however.
The mortgage interest deduction that allows mortgage holders to subtract interest from their taxable income is the single largest housing tax benefit. It doesn’t help low-income households or renters.
It reduces the cost of homeownership, but it does little to increase the supply of homes, the website said.
On the state level, many offer their own LIHTC programs or support affordable housing through trust funds. The real power lies in how states regulate local governments, especially around property taxation.
Spikes Can Make Homeownership Unaffordable
High property taxes introduce complications to the housing market.
Most acutely, sudden spikes in assessed value can make homeownership unaffordable, especially for those on fixed incomes, Realtor.com said. Also, they could discourage homeowners from making improvements because upgrades can trigger reassessments at higher rates.
To understand how these good intentions can go wrong, look no further than two states that tried to protect homeowners by locking in low property taxes—only to inadvertently discourage better use of land.
Some cities have tried flipping the equation—focusing tax pressure on the land itself, not the homes that are built on it.
From 1913 to 2001, Pittsburgh instituted a split-rate system, taxing land at a higher rate than improvements. It encouraged landowners to develop the land rather than speculate on it, which led to fewer vacant lots and more infill development.
Today, Pittsburgh ranks as the most affordable city in America, Realtor.com said. That’s a sign that, when designed thoughtfully, tax policy at the local level can support housing growth rather than choke it.
Realtor.com said that if cities and states want to turn pro-housing rhetoric into real results, they can’t stop at zoning reform, but also need to fix the tax systems that are blocking new construction.
Instead of layering incentives on an already broken system, Realtor.com said that the fix may be as simple as removing the barriers already in place.
“There’s no tax incentive that’s going to overcome things like exclusionary zoning or slow approvals,” Greene said. That’s why he and other housing experts emphasize the need to coordinate tax policy with permitting and land use reform.
Too often, cities claim to support new housing while taxing it like a problem. From front-loading infrastructure costs to misusing abatements, local policies frequently penalize the very thing they’re trying to encourage. But instead of adding carrots, just remove the stick.
“I don’t think they need more incentives,” Greene said. “They need tax systems that stop penalizing housing production.”
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