Thus you can't just shrink lot sizes by 90% and expect to shrink per-lot tax bills by 90%. The average tax, in dollars per acre, must increase in order to compensate for the extra people.
The limit of 1% of the property value looks to be a deal killer here. Cities have an incentive to zone for very low density.
The limit of 2% increase per year is also a huge problem, but not specific to small lots. If inflation ever goes above 2%, disaster strikes all California cities.
Well, there is one other way. Forget about property taxes. Set them all to 0%. Get the required 2/3 majority vote to raise income taxes, then grant a big chunk of that to the cities based on the number of people living there. Perhaps a UK-style council tax would also work.
I'm not an expert, but I would think that holding period for smaller, less expensive, 'starter' homes is shorter than larger homes. If that's the case, you want to zone for that. But, zoning is more about not upsetting voters than grand fiscal planning, in my understanding.
And it would, because property tax is assessed not just on the land but also on the structures. For condominiums each unit is assessed separately.
In addition, the greater the density the lower the cost of infrastructure. I don't think people, especially suburbanites, appreciate how ridiculously expensive roads and sewers are to build and maintain. Mostly because suburbanites tend to move on long before needing to rebuild, leaving behind broken, decaying landscapes. But that game can only last so many decades before society will be forced to deal with the consequences. The consequences are slowly coming into focus across the U.S. but are often couched in terms of affordability in more urban areas (because fewer places to move on to) and the broken finances of municipalities in more rural areas (because they're stuck with what turned out to be inherently unsustainable infrastructure costs).