Cities are the engines of U.S. economic growth, but housing costs put them out of reach for many Americans. One major reason is that cities severely limit new residential construction, especially apartment buildings. For example, San Francisco permits tall buildings only in its northeast corner and Bayview, which together comprise less than a sixth of the city. Housing laws that favor tenants also reduce the incentive for developers to supply new apartments, as Milton Friedman and George Stigler observed as far back as the 1940s. Recently New York state approved a permanent extension of rent control in nearly one million apartments, and Oregon has made it more difficult to evict nonpaying tenants.

The problem is that local voters have an interest in restricting the housing supply. Existing homeowners worry that new housing will lower the prices of their homes. Existing tenants want price controls to limit rents. While prospective residents want new housing in cities, they don’t get to vote in local elections.

Fortunately, there’s a solution to this impasse. New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.

The challenge is how to implement this compromise. Developers can’t pay existing homeowners directly for the right to build new homes—which homeowners would they pay, and how much? But cities could use property taxes to facilitate a side payment. They could charge new residential developments a higher property tax than existing residents, and earmark the additional revenue toward payment of existing residents’ property taxes.

If required, the city could even offer existing residents negative property-tax payments. This tax benefit would shift the political dynamic. Existing residents would support new housing supply because they would recoup in lower property taxes more than they lost from lower housing values. Even tenants would benefit as some of the lower taxes on existing owners would be passed on to renters.

Previous efforts to reduce property taxes for homeowners have made political opposition to new housing worse. In 1978 California’s Proposition 13 limited property taxes to 1% of the original purchase price plus appreciation, which is capped at 2% a year. Contrast that with Chicago, where property taxes are set at 2.1% of home values, which are assessed every three years. Suppose new housing supply were to lower home values in both places. In California this would have almost no effect on property-tax burdens. In Chicago, the assessed value of property would fall, lowering taxes. Relative to Chicago, California punishes existing homeowners for new construction.

Some might worry that raising property taxes on new construction would increase rents for the poor. But limits on housing construction already limit housing options for the poor, and high home prices raise their rents. My proposal would improve the distribution of wealth. According to Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, a small fraction of Americans, mostly concentrated in coastal cities, own a sizable fraction of all housing wealth. My proposal would relax restrictions on development, which would enable new middle-income residents to move to cities.

Politics is messy, as elected officials must balance the interests of competing groups. But policy reforms that increase the total welfare of a community should be possible if the gains can be distributed to potential losers. In housing policy, this can be done through the property-tax system. A straightforward reform could unleash development and expand opportunity in America’s cities.