A tax loophole intended to help the poor is funneling money to wealthy investors.
Buried within the more than 500 pages of Donald Trump’s 2017 tax cut was an unobtrusive line item with potentially damaging consequences. Proposed by Senator Tim Scott of South Carolina, the provision allows governors to select certain census tracts in their states, in economically distressed areas, as “opportunity zones.” The Treasury certified the last of these zones in June, bringing the total number to 8,700. Now, investors who fund projects in these areas will get sizable tax breaks—even on unrelated investments. As long as they dump profits into a fund earmarked for the opportunity zones, they can defer or even eliminate the capital gains they would otherwise have owed.
Some of the census tracts that have been identified as opportunity zones may be truly distressed. But it’s dubious whether others should qualify—this summer, for example, much of Long Island City in New York was named an opportunity zone. Now that Amazon has announced it’s moving one of its two HQ2 branches there, the retail behemoth could nab a $225 million tax break simply because the site happens to fall in one such zone—this, on top of the $1.7 billion New York has already offered Amazon. Investors who purchase apartment buildings for the influx of tech employees will also see tax breaks. So will anyone building office parks, or grocery stores. That money may well be better spent elsewhere, but during the debate over the tax bill, such questions received very little attention. Neither, really, did the zones themselves. Since its passage, though, President Donald Trump has enthusiastically promoted the plan, issuing press releases boasting that “new investment will flow into blighted developments, stalled infrastructure projects, and other desperately needed economic enhancements” and create fiscal improvements that will “help turn dreams to reality.”
The thinking behind the zones reflects Republican faith in privatization as a cure-all. If Trump has departed from conservative orthodoxy on trade and entitlements, he is squarely with the party when it comes to this issue. On the campaign trail, he promised to spend $1.5 trillion on the country’s infrastructure, but when the details of his plan were released a month before the election, it was merely a proposal to privatize roads, bridges, and waterways. Trump has similar plans for the nation’s air traffic control system, the Department of Veterans Affairs, and even the Postal Service. Each one offers huge upsides for a select group of financiers and business owners, but does little to nothing for the American people.
None of these promises has fully gone into law—apart from opportunity zones, the first of which the Treasury implemented this spring. Since then, a number of funds have cropped up to cash in on the boom. Anthony Scaramucci, who served as Trump’s director of communications for all of ten days, plans to launch a $3 billion “opportunity fund” at his hedge fund Skybridge Capital. Cadre, the real estate crowdfunding platform partially owned by Jared Kushner and his brother, Joshua, is also focused on exploiting the zones. As Charles Clinton, the CEO of EquityMultiple, a real estate investment startup, said in September, they are “one of the biggest real estate investment opportunities in decades.”
Similar efforts have been undertaken in the past. In the 1980s, Margaret Thatcher created eleven “enterprise zones” in the United Kingdom, which produced fewer jobs than promised. Each cost the government between $35,000 and $45,000, indexed for inflation. The areas are still home to some of the poorest people in the country. During the 1990s, Bill Clinton set up 104 “empowerment zones” in six urban areas around the United States, including Atlanta, Baltimore, and New York, as well as three rural areas, in Kentucky, Mississippi, and Texas. Clinton’s plan (unlike Trump’s) tried to encourage not just capital investment, but also hiring and upfront investments in equipment. But research on empowerment zones has found that they had little to no effect on economic growth or poverty. They were expensive, too, costing $850 per resident.
One of the reasons why these zones often fail to deliver an economic boost is that governors and investors tend to pick areas that are already on an upswing. (Long Island City is a good example; it had been gentrifying for years before Andrew Cuomo nominated it as an opportunity zone.) In May, the Urban Institute found that 28 percent of the census tracts governors had designated as opportunity zones already benefit from some of the highest levels of private investment. They’d be attractive areas in which to invest with or without a big tax giveaway. In other words, opportunity zones are a massive handout for investors, and there is scant evidence that they bring investment to the places that need it most.
Of course, Trump himself has experience bilking tax breaks and subsidies to make massive profits. He accumulated at least $885 million in tax breaks, grants, and other subsidies from New York to build his empire of hotels and high rises, according to The New York Times, including the longest tax abatement the city ever handed out, 40 years, to rehabilitate the Grand Hyatt Hotel in the ’70s. He even pocketed $150,000 from a fund meant to help small businesses damaged in the September 11 attacks. (He owned a Wall Street skyscraper not far from Ground Zero, but it wasn’t damaged when the planes hit the Twin Towers.) Trump may be the country’s preeminent expert in spotting a government handout to developers and squeezing it for all it’s worth. It’s no surprise that he’d be as excited to stamp his name on these opportunity zones as he would one of his hotels.
There’s a better way. Lyndon Johnson’s Great Society directly financed construction across the country. Dwight Eisenhower built the country’s network of highways. The bipartisan Community Development Block Grant program, enacted in 1974 by Republican President Gerald Ford, gives local communities money for projects they decide are most important for their economies—a program that Trump wants to eliminate.
The Joint Committee on Taxation has estimated that the tax incentives in opportunity zones will cost $1.5 billion a year for the first eight years. Just think what that money could do if directed to build new water lines in Flint, affordable housing in Fresno, decent school buildings in Baltimore, or better roads in Akron. Bankers on Wall Street might not get a payday. But do we care more about their dreams, or those of poor residents in neglected communities?