Thursday, December 20, 2018

How a tax break meant for low-income communities became a mini tax haven for the rich

  The Trump tax bill, signed into law last year, established the Opportunity Zone incentive program. It’s meant to spur growth in low-income neighborhoods by giving investors tax benefits for putting money into distressed areas and leaving it there for a few years.

  The goal of boosting development in low-income areas is certainly laudable, but one major concern is that funds are going to be directed to places that are not really distressed: Take, for instance,  the area where Amazon’s HQ2 will land in Long Island City, the area around a Trump golf course, or the future home of the Las Vegas Raiders NFL franchise, all of which qualify for benefits. Ahead of a White House event last week about Opportunity Zones, reports emerged regarding how the Kushner family business stands to take advantage of the program after Jared Kushner and Ivanka Trump pushed for its creation.

  But high-profile, flashy examples of obvious Opportunity Zone boondoggles don’t highlight the full extent of the problem. For example, look at Rockville, Maryland.

  The Rockville census tract (shown here), outlined in dark green, fits within the definition of economically distressed for the Opportunity Zone program. For a census tract to be eligible, it must either have a poverty rate above 20 percent or median family income below 80 percent of the area median income.

  While the Rockville tract has a poverty rate of 13 percent, well below the threshold, it is at 71.58 percent of area median family income. However, that is a reflection of the fact that Rockville is a suburb of Washington, D.C. that is well-off, with an overall median income of $100,436 in 2017, and that the median income of the tract in question is relatively smaller than that in the overall Rockville area.

  It’s not that this census tract is distressed; it’s that it is relatively less well-off in a sea of wealth.

  This census tract lies along a major highway, the Rockville Pike, which runs between the dark green and light green sections on the map. It is home to many strip malls. It is bordered to the west by the Woodmont Country Club, where the initiation fee is $80,000 and is also the location of new construction, especially around the Twinbrook Metro station, part of the D.C. subway system.

  That’s not exactly the picture of a place that is going to have trouble attracting investment on its own. The Washington, D.C. region has the highest median income of any metropolitan area in the country, and while it certainly has pockets of deep poverty, this isn’t one where investment incentives are desperately needed.

  Due to the Opportunity Zone program, tracts like this that are already experiencing growth will get big benefits and investors will be able to accrue significant tax savings for plopping their money there, while not achieving the core aim of the program. Investors will reap benefits for investments they might have made anyway when the program is meant to entice them into areas they wouldn’t otherwise be. And there’s an opportunity cost at work: Funding that will come to this tract could have gone to other Opportunity Zones in places that are actually in need of capital.

  Just looking at how the program is being touted in the investment community shows how far away from the mission it is in practice. In outlining the top 10 Opportunity Zones, Fundrise — an online real estate investing service — uses home value increases as the metric for investment. It is, therefore, not surprising that the top four are all located in large urban metropolitan neighborhoods in California.

  Other fund managers are looking for an internal rate of return of 12 percent but do not have similar metrics pertaining to the individuals within those communities. To fit within the mission of the program, funds should be tracking metrics like the number of startups created by individuals in the community, the number of living jobs created, or the number of affordable housing units created.

  If the goal is to revitalize low-income communities, the best way is to develop the already existing resources, namely the people who live there. If policy drives investment in individuals in these communities through the development of small businesses, it can spur further investment and uplift distressed communities. Instead, we’re stuck with a program that creates mini tax havens for the wealthy, while leaving low-income communities behind.

  About the author: Gbenga Ajilore is a senior economist at the Center for American Progress.

  This article was published by

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