by Jenna Tsui
A U.S. government program introduced two years ago to encourage new investments in areas of the country that have been left behind economically faces mounting criticism and evidence that it may be driving money into the hands of wealthy investors and accelerating gentrification in already-vulnerable neighborhoods.
Created as part of the Trump administration’s 2017 Tax Cuts and Jobs Act, economic “Opportunity Zones” are specific census tracts that meet certain criteria for high poverty or low income. There are nearly 8,800 designated Opportunity Zones in the U.S.
The law establishing opportunity zones provides special capital gains tax breaks for investors who own and develop property in these areas — 10 percent on investments in opportunity zones held for more than five years, and 15 percent on those held for more than seven years. On its face, the function of the zones is to encourage new investment in economically downtrodden areas of the U.S.
Enriching Political Supporters?
The program has been troubled, however, by allegations of conflicts of interest involving wealthy investors who successfully lobbied the government to expand the zones into areas where they already own property — even when they didn’t meet the criteria needed for the opportunity zone designation.
The Washington Post reported on one case in which the Treasury Department reversed itself after lobbying by Nevada Republicans and agreed to let a previously ineligible county reap huge benefits from the tax law. ProPublica reported on another case involving Detroit billionaire Dan Gilbert. A Brookings analysis of the census tracts designated as opportunity zones found that nearly a quarter didn’t meet the program’s intended poverty rate threshold of 20 percent.
Media reports have also noted that individuals with close ties to the Trump administration — including presidential son-in-law Jared Kushner — are poised to benefit significantly from the zones.
In January 2020, the Treasury Department’s internal watchdog said it had opened an inquiry into the Opportunity Zone program after a request in October from three Democratic members of Congress. The department’s Inspector General told NBC News he expected the review to be completed by early Spring.
The legislation creating opportunity zones was originally co-sponsored by Senator Cory Booker, a Democrat, and Tim Scott, a Republican, in a rare demonstration of bipartisan Congressional unity. But that has since frayed, with Booker and other Democrats citing allegations that senior Treasury officials were “bending regulations, and violating the law that created opportunity zones.” “The underlying legislation, the Investing in Opportunity Act, was intended to support the growth and revitalization of our nation’s most economically underserved communities. It was not the intent of Congress for this tax incentive to be used to enrich political supporters or personal friends of senior administration officials, as recent reports indicate,” the lawmakers said.
The senators have introduced new legislation that would establish reporting requirements for the opportunity zone program. Without the right data, according to Booker, community members can’t tell whether the zones are driving new investments — or, if they are, who exactly is benefiting from the arrangement. He called for “transaction-level reporting so that we can properly evaluate the impact of the program and ensure that investments are being effectively allocated to low-income communities.”
Potential of Opportunity Zones
Supporters argue that opportunity zones can lead to growth in communities and investments that would have not otherwise been possible.
Some evidence exists that the program has been good for tech startups headquartered in opportunity zones by allowing their investors to defer tax payments on capital gains derived from their investments.
Some have offered examples of what they consider to be the program working as intended — like the development of a solar power project on a tract of contaminated farmland in California’s Central Valley, which was able to proceed quicker than anticipated thanks to the tax break.
Meanwhile, the White House seems to have little intention of reforming the project. Donald Trump praised the zones in his State of the Union earlier this year, claiming that the program was causing jobs and investments to “pour into 9,000 previously neglected neighborhoods.”
Trump, in defending the zones, also cited the story of a veteran who had escaped homelessness and addiction by working for a company, R Investments, that takes advantage of the opportunity zones. However, the veteran in question doesn’t work at a site taking advantage of the tax breaks and never has.
The president also claimed that the company in question is helping 200 people rise out of homelessness every year by using the opportunity zone tax break. This statement was also untrue.
Threat of Gentrification
There is little empirical evidence that opportunity zones have contributed to local economic growth so far. And it’s likely that if tech startups do benefit from the program, it will be at the cost of residents.
U.S. Representative Rashida Tlaib, who introduced a bill earlier this year that would repeal the zones outright, says that “American people have been scammed by Opportunity Zones,” and that the program, instead of helping the poor, has only benefited “billionaires and their luxury projects.” Community advocates like Branden Snyder, executive director of Detroit Action, and Dianne Enriquez, Co-Director of Community Dignity Campaigns with the Center for Popular Democracy, have called the legislation a “farce.”
Many opponents of Opportunity Zones — including Brookings fellow Adam Looney and Kinder Institute Director William Fulton — have warned that encouraging investment in economically disadvantaged areas could rapidly accelerate gentrification and displace existing residents, lining the pockets of developers buying land in opportunity zones while harming those who currently live there.
The IRS and Treasury passed new regulations in December 2019 to ensure that investments truly benefited residents, but those regulations may be discouraging potential investors. Tony Nitti, a CPA with 20 years of tax experience, told Forbes that he had no “clients clamoring to move forward” with investing in the zones, despite the potential tax breaks. Nitti also said that he’s seen his experience reflected across the industry. Despite having spoken to “thousands of people at different conferences about Opportunity Zones,” he has “yet to talk to anyone who says, ‘I’ve got a ton of clients doing this.’”
These observations are in line with an academic study on opportunity zones from last year, which found that, so far, the legislation has “primarily passed through the statutory tax benefits to existing landowners, with limited evidence of additional value creation.” The opportunity zone designation was also found to increase property prices. According to analysis from the Tax Policy Center, census tracts experiencing socioeconomic change were around 33 percent more likely to be represented in designated tracts compared to non-designated tracts.
The final verdict on opportunity zones is not yet in, however. The Rockefeller Foundation has reportedly committed $36 million to support organizations such as the Local Initiatives Support Corporation (LISC). One opportunity zone project features a new office development in Washington, D.C., where the anchor tenant is a tech company that will provide 150 jobs.
Opportunity zones have been “too easy to abuse by investors seeking to get a tax benefit without benefiting the community,” Rajiv Shah, head of the Rockefeller Foundation, told the Financial Times. “But it would be a big mistake to write off the law — it is the best incentive we have had in decades to drive capital into areas where we need it.”
Jenna Tsui is an environmental and tech journalist from Texas. With a degree in IT and a passion for sustainability, she often writes about the intersection of the two subjects. She also co-owns The Byte Beat blog and writes for sites like Blue & Green Tomorrow, Green Journal, and Triple Pundit. Check out her work on TBB or follow her on Twitter @jenna_tsui.