Experts disagree about the newest economic development tool to combat U.S. urban decay – By John Ettorre (usnews.com) / Jan 11 2019
CLEVELAND —The tech entrepreneur Sean Parker achieved early fame twice, first for upsetting the music industry’s business model with his innovative Napster technology and later for being an early champion and president of Facebook and a mentor to its founder Mark Zuckerberg. But the billionaire may just achieve more lasting influence for an entirely different innovation: as one of the intellectual architects of federal Opportunity Zones.
Tucked into the tax act of 2017, this provision – formally known as the Investing in Opportunity Act, a brainchild of Parker’s think tank, the Economic Innovation Group – was unnoticed at first, lost in the raging partisan arguments over the steep tax cuts. But as investors and urban advocates began focusing on it as an exciting new tool for assembling patient capital to reinvigorate distressed urban districts, some have called it potentially transformative.
Under the incentive, the IRS now offers qualified investors significant tax savings on capital gains if they invest in projects in one of the 8,700 distressed areas formally chosen by America’s governors and certified by the U.S. Treasury and called Opportunity Zones.
Instead of tax credits or other subsidies, the normal mechanisms the federal government uses to entice investors, under Opportunity Zone provisions investors receive temporary tax deferral for capital gains reinvested in designated Opportunity Zones. For investments held longer than 10 years, that deferral converts to forgiveness, encouraging the formation of so-called “patient capital,” money that isn’t quickly repositioned to chase profits but instead supports long-term projects.
It works this way: An investor might buy stock for $10,000 and sell it for $15,000. If the capital gain of $5,000 is then reinvested in a fund devoted to Opportunity Zone projects, the gains on that investment are then eligible for reduction or forgiveness, depending on the time horizon.
That means a giant pool of unrealized capital gains – the profits from the sale of property or stocks – estimated at $6.1 trillion, is eligible for these reinvestments. As the National Trust for Historic Preservation’s Anthony Veerkamp recently observed, that “constitute(s) either the most significant federal community development incentive in a generation or one of the biggest tax giveaways to the rich in American history.”
Prominent urban policy guru Bruce Katz says the country has never seen an economic development tool like Opportunity Zones before. “I would say most tax incentives that were intended to drive capital into low-income communities – whether they’re urban, suburban or rural – were really policy tools, like the historic preservation credit, or the new market credit” – an earlier plan for luring new investment to distressed areas – and were earmarked for particular ends, he says. “But this is open-ended. You could fund an energy project or housing.”
Katz, a former chief of staff for Secretary of Housing and Urban Development Henry Cisneros and later director of the metropolitan policy program at the Brookings Institute, is an unabashed admirer of the idea. He even thinks it could repair some of the worst ravages of mid-century urban renewal, especially in areas with relatively weak economies.
“Urban renewal happened 60, 65 year ago and basically devastated our downtowns,” he says. “It ripped them apart. It demolished historic structures. It built parking lots, which were supposed to be temporary. But they became permanent.” So if this new way of investing in these areas can repair that damage and improve the employment and fiscal base, he says, then he’s all for it.
He notes that booming coastal markets and thriving inland regions like Denver and Austin don’t really need these zones to stimulate demand. The interest will be greater in forgotten places such as South Bend, Indiana, Oklahoma City and Dayton, Ohio. And, he notes, “the country is more Dayton than Austin.”
But there are deep concerns among some about the lack of normal rules governing these investments. Unlike just about every other federal program designed to promote investment in distressed urban areas, the Opportunity Zone legislation requires no particular outcomes or barometers for judging whether these investments will actually stimulate real improvements in these places. Nor is there any cap on the amount that can be invested.
That’s why some critics dismiss them as little more than tax giveaways to wealthy developers. Eyebrows were also raised when media reports surfaced that the president’s daughter and son-in-law, Ivanka Trump and Jared Kushner, had established a fund devoted to taking advantage of the new investment vehicle, after they personally lobbied for the provision.
“Without requirements around beneficial impact, creation of affordable housing and measurements that make sure you’re producing social good other than investment gains, the significant incentive is for rapid gentrification,” says Jesse Van Tol, CEO of the National Community Reinvestment Coalition. “There’s also no data-reporting requirement. So we may not know what the impact is. From a transparency perspective, how are we going to know 10 years from now if this public policy was a success?”
Some of the lack of enthusiasm for these new investment vehicles perhaps can be traced to the modest effects of past programs targeting distressed urban areas, like the Empowerment Zones pushed through by the Clinton Administration in the 1990s, which political scientist Timothy Weaver found to be ineffective at stimulating inner city development in the research for his book, “Blazing the Neoliberal Trail.” But Katz notes how fundamentally different this program is than in the past. In fact, he says it isn’t even a program, but rather a tool. And unlike past tax incentive programs, directed at businesses, these are directed at investors.
Treasury Secretary Steven Mnuchin recently said as much as $100 billion of new capital could eventually flow to Opportunity Zone projects. Others expect it to be far more. “This isn’t a rat hole idea picked from the far right or far left,” the bill’s co-sponsor Sen. Cory Booker told a New Jersey audience last year. “This is simple business economics of us understanding what governs the investment psychology of people in this country.”
Katz says he has visited perhaps 150 of the zones already and is finding plenty of interest. He is excited by the notion of entrepreneurs and innovators in all sorts of industries and sectors of the economy using the tax incentives to attack problems differently.
“We’ve got a lot of entrepreneurs in different parts of our economy,” he says. “They’re not just in the venture start-ups in Silicon Valley. There are a lot of very smart entrepreneurs inside companies, outside companies, in multiple sectors of our economy. So in a way what this tool does, is it says to people who are first movers in their sectors – whether it’s hospitals, universities, public housing, you name it – ‘If you figure out how this tool works, it’s going to redound to your benefit first.’ But then it’s going to become routine, so it can basically be scaled across the country.”
If the absence of traditional guardrails is cause for concern to people like Van Tol, Katz says that’s the heart of the appeal to those most likely to take advantage of opportunity zone deals.
“When you have the federal government promulgating rules but not providing guidance, the country has basically been told, ‘It’s up to you to figure out the models and norms here.’ And that’s what’s happening.”
