So here is my question, do cities and developers work to limit supply so prices stay high? Thus increase developer profit and cities property tax revenues?
If there were a conspiracy, I would say it would be more-so on the side of existing land owners, not developers. Re-sales benefit from a strong pre-sale market, as re-sales ride the wave while pre-sales fall fall within the present-day cost to build and deliver that inventory (and it's not cheap).
Developers can turn a profit at any price as long as the cost to build is lower than the price they can sell their units for. If they could be selling and making a profit at $300 a square foot they would be.
As for taxes, it's important to remember that mill rates ensure that taxation levels stay relatively the same as the general value of property rises.