Why Legalizing More Housing Isn’t Enough (And What’s Still Holding Buyers Back)

Over the past few years, housing reform has focused heavily on one big idea: allow more homes to be built. And on paper, a lot has changed.

Since 2023, cities and states across the country have passed more than 200 pro-housing laws aimed at loosening zoning rules, allowing more density, and cutting red tape that slows down construction. The goal was straightforward. If you make it legal to build more housing, supply should increase and affordability should improve.

But that’s not exactly how it’s played out.

Despite all that progress, new home construction slowed to its weakest pace since 2020 late last year. That disconnect highlights an important truth in today’s housing conversation: making housing legal to build doesn’t always make it financially possible to build.

Zoning may open the door, but tax policy decides whether anyone can actually walk through it.

Legal Doesn’t Always Mean Feasible

While many governments have reworked zoning and land-use laws, far fewer have examined whether their tax systems support new housing or quietly work against it.

That gap matters. Housing development is ultimately a math problem. If the numbers don’t work, projects stall, even if zoning technically allows them.

As housing policy experts often explain, land-use rules determine what’s allowed, while tax policy determines what’s realistic. Taxes influence whether a project can attract financing, how risky it is, and whether builders move forward at all.

The Tax Policies That Shape Housing Supply

At the federal level, one of the most effective tools for encouraging housing production is the Low-Income Housing Tax Credit (LIHTC). This program helps offset costs for developers building or renovating affordable rental housing, and today it supports the vast majority of new income-restricted rental homes nationwide.

Other tax benefits, however, don’t increase supply in the same way. For example, the mortgage interest deduction helps homeowners reduce their tax burden, but it doesn’t encourage new construction or help renters become buyers.

At the state and local levels, property taxes play an even bigger role. High or unpredictable property taxes can discourage development, renovations, and even everyday home improvements. In some cases, improving a home can trigger a reassessment that dramatically raises taxes, making upgrades financially risky.

While tax caps and assessment limits are often designed to protect homeowners, they can also distort housing markets over time, discourage mobility, and reduce overall supply.

When Well-Intended Policies Backfire

California’s Proposition 13 is a well-known example. By capping property tax increases, it helped longtime homeowners maintain stable tax bills. But it also discouraged people from selling, reducing turnover and limiting available inventory. Over time, supply tightened while demand continued to grow.

Florida’s “Save Our Homes” law operates similarly, but with a twist. Major renovations can trigger a full reassessment at current market value. In some cases, homeowners have seen their property taxes skyrocket after improving their homes, effectively penalizing better land use.

On the flip side, some cities have tried a different approach. Pittsburgh, for many decades, taxed land more heavily than the buildings on it. This encouraged development rather than speculation and helped reduce vacant lots. Today, it remains one of the more affordable major cities in the country, showing that thoughtful tax policy can support housing growth instead of stalling it.

What Actually Needs to Change

If states and cities truly want to improve affordability, zoning reform can’t stand alone. Tax systems need to align with housing goals, not undermine them.

In many cases, the solution isn’t more incentives or complicated programs. It’s removing the financial penalties that already exist. Front-loaded fees, unpredictable assessments, and tax structures that punish construction all add risk and cost, which ultimately get passed on to buyers and renters.

Housing policy works best when land-use reform, permitting, and tax policy move in the same direction. Without that coordination, even the strongest pro-housing laws risk becoming wins on paper only.

Bottom Line

Legalizing more housing is a critical first step, but it’s not the finish line. Until tax policies stop making new construction financially difficult, housing supply will remain constrained, and affordability will continue to be a challenge for buyers and renters alike.

Real progress happens when cities and states remove the barriers that quietly block housing production, not just the ones that make headlines.

Credit: Adapted from reporting and analysis originally published by Realtor.com®