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INSIGHT: Opportunity Zone Proponents Should Welcome Reforms, Not Fight Them

Jan. 14, 2020, 2:01 PM

The opportunity zone (OZ) incentive was initially touted as one of the most equitable parts of the 2017 Tax Cuts and Jobs Act. It was promoted as an economic development program that would lift up distressed communities throughout the country in both urban and rural areas. But there is increasing doubt as to whether the program is more than another tax giveaway for wealthy investors.

The OZ incentive allows investors who rollover capital gains into a qualified opportunity zone fund to receive a significant tax deferral and a full tax exemption on capital gains from the OZ investment. The incentive was criticized for being poorly designed and without an understanding of why certain communities were distressed.

Another issue is the lack of reporting requirements by fund managers about how much money will be invested, where the money is going, and the nature of the projects. The original version of the bill, the Investing in Opportunity Act, mandated that Treasury study some of these issues, but due to reconciliation rules during the TCJA process, that was stripped out. The Treasury Department has so far failed to introduce accountability and transparency in the program: There is no independent certification process for new funds, and virtually no real transparency into funds and their investments given that tax information is confidential.

Throughout 2018, many examples of new projects and large sums of capital gains being funneled into OZ funds peppered news stories. However, in 2019, the tide started to shift with reporting by Propublica, the New York Times, and other media organizations, which found evidence of abuse of the OZ incentive where wealthy investors were apparently using their access to state governors to influence which census tracts would be eligible to ensure their existing investments would qualify under the program. In Baltimore, Maryland’s governor Larry Hogan nominated a census tract that happened to include Under Armour CEO Kevin Plank’s planned investments. This occurred after Hogan’s aides met with lobbyists for Plank, even though Hogan’s chief of staff noted that the tract should not qualify. The tract is much wealthier than surrounding areas and arguably should not have been eligible. In Florida, well-connected developers lobbied then-Governor Rick Scott to have certain wealthy areas designated—for which the developers would receive a tax benefit.

Proponents have decried these stories as misleading and aberrations to a necessary program. However, if the proponents truly believe in their program and want it to work, they should welcome these stories as they should push policymakers to revisit the OZ incentive. Many in the think tank and advocacy communities have called for significant changes in the incentive. There is a need for measures requiring transparency and accountability as well as substantive guardrails to ensure the projects created are for the existing residents in the community. Finally, there should be sanctions in the form of the revocation of tax benefits if the projects don’t meet a community standard. There is none of this in the current incentive, and Treasury regulations have completely ignored these concerns. Without such measures, wealthy investors will continue to reap large tax breaks for projects that have little benefit for low-income OZ residents. This is why we see so many negative stories about OZs.

It is incumbent on Congress to halt any forward momentum with OZs and craft a framework to make OZs a program that will guide benefits towards existing residents, not to wealthy investors. In the recent months, several policymakers have introduced bills seeking to amend the incentive. Sen. Ron Wyden (D-Ore.) has proposed a fix that would not only add reporting requirements but also revisit census tract designations and impose other substantive rules to curb abuse. Rep. Hank Johnson (D-Ga.) has proposed a bill that mandates community involvement in any investment in an OZ. Rep. Rashida Tlaib (D-Mich.) introduced a bill that calls for a full repeal. This flurry of activity may not have occurred in the absence of the critical press accounts and efforts by analysts and advocates to highlight flaws of the incentive.

Proponents should take the long view: rather than defensively combating these stories. They should engage with critics and use these stories to spur changes that will ensure transparency and accountability, while making certain input from the community is part of the evaluation process.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Olugbenga Ajilore is a senior economist at the Center for American Progress.

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