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 Proposed Canon
In most cities the tower is used as the headquarters for rulers and their Warlords; cities with a palace have a building with rooms, chambers, feast halls, and other facilities attached to the tower. So Casters in the palace wouldn't get the tower boost. These rooms can include the Situation Room, the Portal Room, the Dungeon (usually in the basement though), and the Throne Room.
Since palaces have only been mentioned in relation to the capitals of royal Sides it's possible only royals may build them. Though it may be that any ruler can build one, but royals are likeliest to want to build one. Lady Allison Chains commented that razing and rebuilding Weatherbug from flooded fortress to dry palace would be expensive, so building a palace may represent an additional city building or improvement expense, coverable either with Shmuckers or extensive applications of Signamancy. This implies non-capitals can have palaces, or at least very swanky accommodations.
Notably the original city of Gobwin Knob didn't have a palace despite being built by King Saline IV or one of his Royal ancestors. When Stanley ordered it rebuilt following the Volcano Uncroaking, Thinkamancer Maggie and Dirtamancer Sizemore Rockwell took the initiative to form a Caster Link and create a highly stylized and ornate style focusing on Stanley. However, these Signamancy improvements (even those to the tower) didn't qualify it as a palace.
 Cities with Palaces
- City of Homekey - Capital of Homekey
- Sansabelt - Capital of Haggar
- Spacerock - Former capital of Jetstone, currently for Gobwin Knob
- City of Squashcourt - Capital of Squashcourt
- City of Transylvito - Capital of Transylvito
- City of Unaroyal - Former Capital of Unaroyal, currently neutral and unclaimed