CHRIS EDWARDS, CATO INSTITUTE
The Tax Cuts and Jobs Act of 2017 included capital gains tax cuts on investments in chosen areas called “opportunity zones.” There are about 8,700 O Zones across the country, which were selected by state governors based on rules in the federal statute.
O Zones are a bad idea and should be repealed. They actively divide the nation between winner and loser communities. They replace equal justice under law with differential treatment based on political pull. The main winners likely are landowners within the zones, not poor households.
Business investment and low capital gains taxes are good things. But tax policy should aim to create equal treatment for investments across the economy to maximize growth and fairness while minimizing corruption.
If cities want to subsidize investment in particular neighborhoods, they can do so. But O Zones create a dangerous precedent of using federal taxing power to micromanage local economies. The Republican O Zone law parallels failed Democratic efforts since the 1960s to top-down plan cities with federal spending subsidies.
Policymakers who want to fix particular neighborhoods in their hometowns should run for city hall, not the federal legislature. Even better, they should put their money where their mouths are and start businesses in poor neighborhoods themselves to create growth and opportunities.
The New York Times investigated O Zones in a lengthy article on the weekend. The article probably focused too much on the cultural aspects of wealth. It associated O Zones with high-end condos, rooftop pools, yoga studios, pet spas, shrimp tempura tacos, and sweeping views of Biscayne Bay.
Nonetheless, the main theme of the NYT piece was spot-on. O Zones were supposed to help low-income households, but they appear to be mainly benefiting developers, investors, lawyers, accountants, consultants, lobbyists, and other intermediaries. This is a common problem with government efforts at aiding poor communities. In addition to the program beneficiaries noted by the NYT, I would add landlords who owned property in O Zones when the legislation passed.
Here are some highlights from the NYT article:
The stated goal of the tax benefit — tucked into the Republicans’ 2017 tax-cut legislation — was to coax investors to pump cash into poor neighborhoods, known as opportunity zones, leading to new housing, businesses and jobs.
The initiative allows people to sell stocks or other investments and delay capital gains taxes for years — as long as they plow the proceeds into projects in federally certified opportunity zones. Any profits from those projects can avoid federal taxes altogether.
“Opportunity zones, hottest thing going, providing massive new incentives for investment and job creation in distressed communities,” Mr. Trump declared at a recent rally in Cincinnati.
Instead, billions of untaxed investment profits are beginning to pour into high-end apartment buildings and hotels, storage facilities that employ only a handful of workers, and student housing in bustling college towns, among other projects.
Many of the projects that will enjoy special tax status were underway long before the opportunity-zone provision was enacted. Financial institutions are boasting about the tax savings that await those who invest in real estate in affluent neighborhoods.
… Sean Parker, an early backer of Facebook, helped come up with the idea of pairing a capital-gains tax break with an incentive to invest in distressed neighborhoods. “When you are a founder of Facebook, and you own a lot of stock,” Mr. Parker said at a recent opportunity-zone conference, “you spend a lot of time thinking about capital gains.”
Starting in 2013, Mr. Parker bankrolled a Capitol Hill lobbying effort to pitch the idea to members of Congress. That effort was run through his Economic Innovation Group. In addition to Mr. Parker, the group’s backers included Dan Gilbert, the billionaire founder of Quicken Loans, and Ted Ullyot, the former general counsel of Facebook.
The plan won the support of Senators Cory Booker, Democrat of New Jersey, and Tim Scott, Republican of South Carolina. When Congress, at Mr. Trump’s urging, began discussing major changes to the federal tax code in 2017, Mr. Parker’s idea had a chance to become reality.
Mr. Scott, who sponsored a version of the opportunity-zone legislation that was later incorporated into the broader tax cut package, said it was “for American people stuck, sometimes trapped, in a place where it seems like the lights grow dimmer, and the future does, too.”
… But even supporters of the initiative agree that the bulk of the opportunity-zone money is going to places that do not need the help, while many poorer communities are so far empty-handed.
Some opportunity zones that were classified as low income based on census data from several years ago have since gentrified. Others that remain poor over all have large numbers of wealthy households.
… In some cases, developers have lobbied state officials to include specific plots of land inside opportunity zones. In Miami, for example, Mr. LeFrak — who donated nearly $500,000 to Mr. Trump’s campaign and inauguration and is personally close to the president — is working with a Florida partner on a 183-acre project that is set to include 12 residential towers and eight football fields’ worth of retail and commercial space.
In spring 2018, as they planned the so-called Sole Mia project, Mr. LeFrak’s executives encouraged city officials in North Miami to nominate the area around the site as an opportunity zone, according to Larry M. Spring, the city manager. They did so, and the Treasury Department made the designation official.
… Financial institutions are not even trying to make it look as if their opportunity-zone investments were intended to benefit needy communities. CBRE, one of the country’s largest real estate companies, is seeking opportunity-zone funding for an apartment building in Alexandria, Va., which CBRE is pitching to prospective investors as “one of the region’s most affluent locations.”
Chris Edwards is the director of tax policy studies at the CATO Institute and editor of www.DownsizingGovernment.org. He is a top expert on federal and state tax and budget issues. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.