Putting a second story on likely includes increasing the number of bedrooms, which theoretically increases the number of people who could be living there and thus increase the burden on city services. Renovating for quality and building additions to the square footage aren’t equivalent.

I think lot sizes are still a much bigger factor, though: a house renovated/rebuilt to max out the allowed FAR (floor-area ratio) on a 1/4 acre lot still ought to get taxed less than a modest-sized house on a 2-acre lot.