In 2025, States Legalized More Housing—but Sticky Tax Policies Are Still Hurting Builders and Buyers

Since the COVID-19 pandemic boom, the housing reform conversation has been dominated by one big idea: legalize more homes. 

In response, cities and states passed roughly 225 pro-housing bills since 2023, according to research from the Mercatus Center, rewriting zoning maps, loosening density rules, and trying to clear the bureaucratic brush that slows construction.

The idea was simple: If you allow more housing, supply will follow.

But that promise has hit a wall. New construction reached its slowest pace since 2020 in October, underlining the fact that while legality may have been the first hurdle to building new homes, it was far from the last. What remains is the complicated calculus that determines what projects are financially workable.

That’s the missing link in today’s pro-housing playbook. Zoning can open the door, but tax policy decides whether anyone walks through it. And until tax systems stop penalizing housing production, many of the country’s biggest land-use wins risk remaining victories on paper.

How tax policy shapes what gets built: ‘Legal’ isn’t the same as ‘feasible’

While cities and states have taken a hard look at their zoning laws, fewer have examined whether their tax systems support or sabotage new housing construction.

That disconnect looms as a specter over the future of sustained housing starts.

“I tend to think of land use as being about determining what's legal, and then tax policy determines what's feasible,” explains 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 explains. “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.”

That calculus affects every stage of development. If taxes are due early in the process—before construction even begins—it ties up capital for longer, increasing risk. That risk isn’t evenly shared. Some tax structures shift more of the uncertainty onto the developer; others make long-term projects more viable. Ultimately, the system influences which projects move forward, what types of homes get built, and who’s willing to finance them.

Greene puts it plainly: “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.”

These forces don’t just shape decisions made by large developers; they ripple out to small landlords and homeowners, 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.

The tax policies that shape housing the most

To understand those ripple effects, 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 points to the Low-Income Housing Tax Credit (LIHTC) as the most effective tool for producing new affordable housing. The program allocates roughly $10.5 billion in annual tax credits to support the acquisition, rehabilitation, or construction of rental housing for lower-income households. 

It’s a clear example of how tax policy makes housing viable by reducing long-term tax liability and improving the return profile for investors. Today, LIHTC finances about 90% of all new income-restricted rental housing built in the United States.

But other federal incentives are far less targeted. 

The mortgage interest deduction—which allows mortgage holders to subtract interest from their taxable income—is the single largest housing tax benefit, but it doesn’t help low-income households or renters. And while it does reduce the cost of homeownership for those who qualify, it does little to increase the supply of homes.

On the state level, many offer their own LIHTC programs or support affordable housing through trust funds. But the real power lies in how they regulate local governments, especially around property taxation.

High property taxes introduce a slew of complications to the housing market. Most acutely, sudden spikes in assessed value can make homeownership unaffordable, especially for those on fixed incomes. They can also discourage homeowners from making improvements, since upgrades often trigger reassessments at higher rates.

And while state-level reforms like caps on assessments or limits on annual tax growth are intended to help residents stay put, they can unintentionally distort the broader tax base—undermining both fairness and local revenue over time.

When help hurts supply

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. 

California’s Proposition 13 is the clearest case. Passed in 1978, it caps property tax assessments and limits how much they can rise each year. While it succeeded in stabilizing tax bills for longtime owners, it also discouraged them from selling.

Over time, that froze the supply.

“Prop 13 really shows what happens when land is under-taxed," Greene explains. "Housing supply freezes, even as the demand explodes.”

And today, California is paying the price: The state scored an F on its affordability report card from Realtor.com®, both for its high home prices and lack of new construction.

Florida’s “Save Our Homes” law follows a similar logic, capping annual assessment increases to protect long-term homeowners. But it contains a major catch: A significant remodel (what pro-housing advocates typically view as a win) can trigger a full reassessment of the home at current market value, as if it were brand-new construction. 

That’s what happened to one Florida couple whose property tax bill jumped from $15,000 to over $91,000 after renovating their home. In effect, they were punished for improving their land use.

There is, however, another way. Some cities have tried flipping the equation—focusing tax pressure on the land itself, not the homes built on it. 

Pittsburgh is a shining example. From 1913 to 2001, the city instituted a split-rate system, taxing land at a higher rate than improvements. It encouraged landowners to develop the land rather than speculate it, leading to fewer vacant lots and more infill development.

And today, the Steel City ranks as the most affordable city in America—a sign that, when designed thoughtfully, tax policy at the local level can support housing growth rather than choke it.

A new way forward: Tax reforms that stop penalizing production

If cities and states want to turn pro-housing rhetoric into real results, they can’t stop at zoning reform. They also need to fix the tax systems that are quietly blocking new construction.

But instead of layering incentives on an already broken system, 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 explains. 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 says. "They need tax systems that stop penalizing housing production.”