#childsafety | Opinion | How Opportunity Zones Became a Tax Loophole for the Rich


Congress tucked a provision into the 2017 tax bill that led to the creation of 8,764 tax havens across the United States called opportunity zones.

A capital-gains tax break sold as a way to induce the wealthy to invest in poor neighborhoods, opportunity zones appear to be providing more opportunity for the wealthy to cut their tax bills than to the people who live in designated zones. It’s a case study on how very hard it is to tweak the tax code to direct money to places and activities that Congress favors without creating windfalls for the rich.

Opportunity zones were partly conceived by the entrepreneur and philanthropist Sean Parker, made famous by his role in the rise of Napster and Facebook. He was sure he had a better way to reduce poverty than policy wonks or bureaucrats did. So he funded a start-up think tank and hired a couple of sharp Washington insiders who skillfully maneuvered opportunity zones into the Tax Cuts and Jobs Act — with a big assist from Senator Tim Scott, Republican of South Carolina. All this with little public scrutiny of details.

And therein lies the problem. Architects of opportunity zones believed that previous attempts to use the tax code to push money to capital-starved neighborhoods flopped because they had too many rules and required investors to navigate maddeningly complex bureaucratic mazes. So their disruptive version of place-based policy had few rules and little government oversight. Once governors designated opportunity zones from a list of census tracts that the law made eligible, almost any investment in a property or business in a zone qualified. One doesn’t need to even assert that an investment will help the people who live in the zone.

It sounds good. Lots of tax-averse wealthy people have money to invest. Scores of left-behind communities are starved for capital. Public policy can and should intervene. But Mr. Parker and allies apparently failed to appreciate the cleverness and aggressiveness of lawyers, accountants and money managers employed by the wealthy. They found myriad ways to exploit opportunity zones to reduce clients’ tax bills without much attention to those who live in the zones.

Accounting firm brochures and websites are peppered with headlines like “Using Opportunity Zone Investment to Supercharge Estate Planning” and “Investing in Qualified Opportunity Zones With Irrevocable Grantor Trusts.” In the trade press, a tax lawyer explains how to combine the opportunity zone tax break with an existing tax break for selling stock in small businesses. On a popular opportunity zone website someone asks, “How can I combine cryptocurrency mining while taking advantage of the opportunity zones tax incentive?” Another site advises how best to combine the benefits of opportunity zones with the historic tax credits.

At an opportunity zone conference, and there have been dozens, I heard a developer describe how he combined several other tax breaks with opportunity zones to finance a hotel. “There haven’t been a lot of tax programs where you can layer all these things on like we can with this, so it’s been a great thing for us,” he said.

Don’t blame the players; blame the game.

Hard data on opportunity zones is limited — a reporting requirement was stripped from the bill because of obscure Senate rules. But a Joint Tax Committee economist got access to 2019 tax returns. Average income of opportunity zone investors: $1.1 million. After all, only people with unrealized, and thus untaxed, capital gains can invest in opportunity zones. In other words, only the rich can play.

Those tax returns showed that 84 percent of the zones got no opportunity zone money at all. Half the money went to the best-off 1 percent of zones. That’s hardly surprising. With so many zones to choose from, much of the money flowed to those that were already rising or those that governors chose foolishly. Some 25 percent of New York State’s opportunity zones are in booming Brooklyn. The city government in Austin, Texas, one of the fastest-growing metro areas in the nation, asked for four opportunity zones. The governor allotted it 21.

Opportunity zone money is funding the revival of downtown Erie, Pa., and affordable housing in South Los Angeles, but a lot more of it is going to projects like a Ritz-Carlton hotel and condo complex in downtown Portland, Ore., and a Virgin Hotel in New Orleans. Self-storage facilities, which create hardly any jobs, are sprouting with opportunity zone money. So is luxury student housing in university towns, which are eligible only because college kids show up as poor in census tallies.

So what do we learn from all this? If we’re going to use the tax code to nudge rich people to invest in poor neighborhoods, we need stronger guardrails to direct money to intended destinations and more aggressive oversight — yes, from the Treasury Department and the I.R.S. — to counter the legions of well-paid loophole finders.

Big fixes require Congress — to strip the opportunity zone designation from tracts that aren’t truly low income, restrict investments eligible for the tax break, impose reporting requirements on opportunity zone funds. But the Treasury could also demand and publish more data on where opportunity zone money is going and rewrite the Trump-era anything-goes rules so that more of that money is used for its intended purpose.

During his campaign, President Biden vowed to “reform opportunity zones to fulfill their promise,” but so far, the administration hasn’t proposed anything or used its regulatory muscle. And its proposed capital-gains tax increase and other tax increases would only make opportunity zones even more attractive to the tax-averse rich.

David Wessel is the director of the Hutchins Center on Fiscal and Monetary Policy and a senior fellow in economic studies at the Brookings Institution. He is the author of “Only the Rich Can Play: How Washington Works in the New Gilded Age.”

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