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Congress inserted a provision into the 2017 tax bill that led to the creation of 8,764 tax havens across the United States, called “opportunity zones.”
With a capital gains tax break sold as a way to get the rich to invest in poor neighborhoods, opportunity zones appear to offer more opportunities for the rich to reduce their taxes than to people who live in poor areas. designated. This is a case study of the difficulty of changing the tax code to direct money to places and activities that Congress promotes without creating bargains for the rich.
The Opportunity Zones were partially designed by entrepreneur and philanthropist Sean Parker, made famous by his role in the rise of Napster and Facebook notoriety. He was sure he had a better way to reduce poverty than politicians or bureaucrats. So he funded a start-up think tank and hired a few savvy Washington insiders who skillfully maneuvered areas of opportunity in the tax cuts and jobs law – with great help from the senator. Tim Scott, Republican of South Carolina. All of this with little public scrutiny of the details.
And this is where the problem lies. Opportunity Zone Architects believed previous attempts to use the tax code to push money into capital-strapped neighborhoods had failed because they had too many rules and forced investors to navigate markets. maddeningly complex bureaucratic labyrinths. So their disruptive version of place-based politics had few rules and little government oversight. Once governors designated areas of opportunity from a list of census tracts that the law made eligible, almost any investment in a property or business in an area was eligible. You don’t even have to say that an investment will help the people who live in the area.
It sounds good. Many of the low-tax rich have money to invest. Dozens of communities left behind lack capital. Public policies can and must intervene. But Mr. Parker and his allies have apparently failed to appreciate the intelligence and aggression of the lawyers, accountants and money managers employed by the wealthy. They found a myriad of ways to exploit the areas of opportunity to reduce customer tax bills without paying too much attention to those who actually live in the areas.
The brochures and websites of accounting firms are peppered with headlines like “Use investment in the area of ​​opportunity to boost estate planning †and “Invest in areas of qualified opportunity with irrevocable grantor trusts. “ In the trade press, a tax lawyer explains how to combine opportunity zone tax relief with pre-existing tax relief for the sale of shares in small businesses. On a popular Opportunity Zones website, someone demand: “How can I combine cryptocurrency mining while taking advantage of the Opportunity Zones tax incentive?” Another site advises how best to combine the advantages of the opportunity zones with the Historic tax credits.
At a conference on Opportunity Zones, and there have been dozens of them, I heard a developer describe how he combined several other tax breaks with Opportunity Zones to fund a hotel. “There haven’t been a lot of tax programs where you can layer all of these things like we can with that, so that’s been a good thing for us,†he said.
Don’t blame the players, blame the game.
Hard data on areas of opportunity is limited – a reporting requirement was removed from the bill due to obscure Senate rules. But an economist from the Joint Tax Committee access to 2019 tax returns. Average Income of Opportunity Zone Investors: $ 1.1 million. After all, only people with unrealized capital gains, and therefore untaxed, can invest in the opportunity areas. In other words, only the rich can play.
These tax returns showed that 84 percent of the zones received no money from the opportunity zones. Half of the money went to the richest 1% of the areas. This is hardly surprising. With so many areas to choose from, a lot of the money went to those that were already on the rise or those that governors stupidly chose. Some 25 percent of New York State’s Opportunities Zones are booming in Brooklyn. The city government of Austin, Texas, one of the fastest growing metropolitan areas in the country, has requested four zones of opportunity. The governor assigned him 21.
The Opportunity Zone money is funding the revival of downtown Erie, Pa., And affordable housing in South Los Angeles, but much of it goes to projects like a Ritz-Carlton hotel and a condo complex in downtown Portland, Oregon, and a Virgin Hotel in New Orleans. Self-storage facilities, which create virtually no jobs, are pushing money into areas of opportunity. The same is true for luxury student accommodation in university towns, which is only eligible because college students present themselves as poor in census counts.
So what do we learn from all of this? If we are to use the tax code to push the rich to invest in poor neighborhoods, we need stronger safeguards to direct money to intended destinations and more aggressive oversight – yes, from the Department of Treasury and IRS – to counter the legions of well-paid loophole seekers.
Big fixes require Congress – removing the designation of opportunity zones from sectors that are not truly low-income, restricting investments eligible for tax relief, imposing reporting requirements on zone funds opportunity. But the Treasury could also demand and release more data on the areas of opportunity where the money goes and rewrite the Trump-era rules on everything that happens so that more of that money goes to the people. intended purposes.
During his campaign, President Biden promised to “Reform areas of opportunity to keep their promise” but so far the administration has neither offered nor used its regulator muscle. And his proposal for capital gains tax hikes and other tax hikes would only make the opportunity areas even more attractive to the tax-averse wealthy.
David Wessel is Director of the Hutchins Center on Fiscal and Monetary Policy and Senior Fellow in Economic Studies at the Brookings Institution. He is the author of “Only the Rich Can Play: How Washington Works in the New Gilded Age”
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