One of the most regressive provisions in the 2017 Trump-GOP tax law is the so-called “opportunity zone” tax break(OZ) which proponents claimed would encourage investment in low-income neighborhoods, but has instead been ruthlessly exploited by wealthy real-estate investors. In fact, this program has failed to deliver the promised economic opportunity to underserved communities, instead turning many of these neighborhoods into what can more accurately be described as Exploitation Zones.
How Opportunity Zones Work
The program allowed governors to designate a fixed number of census tracts in their state to receive OZ investments if they meet loose geographic and economic criteria. Investors then could set up special “Qualified Opportunity Funds” which would benefit from the tax break, if the fund’s money was invested in OZ property.
Opportunity Zones Lets Wealthy Investors Dodge Taxes
Unlike most investment portfolios, Opportunity Zones allow for upfront tax deferral for any capital gains realized if it is immediately transferred to a qualified fund. So if Elon Musk sold Tesla stock with $1 billion worth of gains, rather than paying $238 million in federal income taxes, he could defer paying those taxes for ten years by directing that $1 billion to an OZ fund. Then, the tax on that gain is reduced if the money is held in the fund for as little as five years. Finally, any capital gains derived from the OZ investment itself becomes permanently tax-free if the money is held in the fund for at least 10 years.
Opportunity Zones Are Ineffective & Lack Proper Oversight
1. Opportunity Zones are designed to benefit big developers, not the existing residents. The special tax breaks disproportionately advantage the richest 1% of households, with the average income of an investor being $4.9 million.
2. The program operates with little to no oversight because reporting rules were stripped out during legislative consideration. For instance, there are no reporting requirements on economic data such as job creation or poverty reduction. The few existing regulations are so convoluted that a Opportunity Zone fund could put as little as 40% of their money into a designated census tract but still fully benefit from the tax break.
3. Despite being designed to help distressed communities, most of the investments have flowed to a small number of affluent areas. One study discovered that only 16% of eligible tracts had received any dollars from the program, while the top 1% of wealthiest tracts received half of all investments.
4. There is a growing consensus in the academic literature that, instead of encouraging new projects, the tax break is a tax windfall for already planned projects. But in the unlikely case Opportunity Zones do have an economic impact it would likely be worsening displacement in historically black and brown communities by accelerating gentrification.
The cost of the Opportunity Zone Program has spiraled out of control since its inception. Originally it was projected to cost $12.4 billion before expiring in 2026. However it is now projected to lose $70 billion of revenue over the next decade if made permanent.
CONGRESS SHOULD REJECT EXTENDING TAX BREAKS FOR THESE COSTLY & DISCREDITED OPPORTUNITY ZONES; INSTEAD CONGRESS SHOULD MAKE DIRECT PUBLIC INVESTMENTS INTO COMMUNITIES.