Congress Needs to Fix the Opportunity Zone Boondoggle

The program, a cluster of tax loopholes, is making fat cats fatter without doing much about racial inequities and urban joblessness. There are ways to reform it to benefit those it was touted to help.

US-NEWS-TRUMP-DRUG-GET
President Donald Trump speaks on May 18 during a meeting to discuss Opportunity Zones. (Doug Mills/The New York Times/Pool/Getty Images/TNS)
TNS
It's been four weeks since George Floyd was killed in Minneapolis. Amid the widespread urban turbulence that ensued, the TV business-news channels were full of commentators and business executives giving lip service to "action over words" and "systemic change." That lasted about 10 days; the video pundits are back to touting stocks and the "green shoots" of economic recovery. Meanwhile, Congress has done nothing to address urban America's now-worsening economic disparities.

So here's where to start: Opportunity zones need major reforms and a quick redesign to actually chip away at racial inequities and urban joblessness.

Opportunity zones (OZs) were included in the 2017 federal tax cut act as an ostensibly bipartisan strategy to lure investment capital into lower income communities. The White House repeatedly ballyhoos this largesse as proof of its commitment to communities of color. But many OZ deals today are little more than a tax shelter for rich old white guys to dodge income taxes on their previously accumulated investment profits by opportunistically financing building projects that were mostly already lined up in safe, unblighted neighborhoods. Worse yet, they can double-dip IRS depreciation tax loopholes when these properties are sold. And worst of all, the venues for most of these tax giveaways rarely uplift neighboring minority communities once the non-resident builder crews pack up their trucks and leave.

Systemic racism is when a black man is killed over a bogus $20 bill while white aristocrats pull down millions in legalized tax shams disguised as progressive.

To capsulize the core problems, the OZ tax loophole works like this:

  • States designate specific census tracts as eligible for federal OZ tax breaks. Most states have done a reasonable job of soliciting local government input, although there are some dubious zones such as collegiate census tracts where students' miniscule earnings skew averages below qualifying low-income thresholds, not to mention a tract in 91 percent white Storey County, Nev., that's home to a Tesla factory and associated with the presidentially pardoned felon Michael Milken.
  • Real-estate investors who finance construction in these zones offset revenues from the projects with depreciation tax deductions. First, they avoid capital gains taxes. Then, when they sell the properties, they are able to weasel out of the standard IRS requirement for "recapture" of the accumulated untaxed depreciation, thanks to a lavish tax exemption that sneaked through Congress.
  • While OZ businesses must spend a minimum percentage locally in the zone, there's no focus whatsoever on minority co-ownership or on management and workforce demographics.
Most of the investment funds that have been established to exploit these tax breaks are putting their money into construction of buildings, not the operation of businesses that would provide ongoing, expanding employment. Why? Operating companies typically require far less taxable capital that can be sheltered, so fees for OZ fund managers are lower. It's thus no wonder that relatively few minority-led businesses have received investment capital under this law.

Congress needs to plug OZ tax loopholes, curtail crony capitalism and insert new provisions that actively promote minority ownership, management and employment. Such corrections alone won't cure America's persistent social and economic inequalities, but the following are good for starters:

  • Require that OZ construction projects employ a plurality of women and minority workers on the basis of total compensation, not just headcount. Mandate local approval of these tax write-offs for luxury apartments and gentrifying enclaves as a way to implant civic leverage to secure good-neighbor builder concessions.
  • So that neighboring communities ultimately derive some tangible benefits, require OZ building projects to contribute 5 percent of revenues annually to a municipally supervised revolving loan fund dedicated to local minority-owned startups. That's just a fraction of the investors' tax benefits.
  • For qualified startup OZ businesses that hire recently unemployed minority workers, provide a federal income tax credit of $500 monthly for up to 30 months for both the employer and each of those workers.
  • Authorize states, cities and counties to designate additional zones for these OZ tax benefits to be provided exclusively to predominantly minority-owned, -operated and -staffed businesses.
  • Prohibit elected and presidentially appointed federal officials and their investment affiliates from participating in these deals.
  • Reimpose depreciation recapture taxes when OZ properties are sold unless the investors make additional qualifying community-nonprofit contributions. The back-end OZ depreciation loophole is inside baseball that slipped past the 2017 Congress like a spitball pitch.
  • Allow simplified OZ rollover investments from IRA, 401(k), 403(b) and 457 accounts, making OZs' tax-free investment benefits available to middle-class retirees. With trillions of liquid assets available to unlock, retirement savers can easily replace any disgruntled fat cats who spurn transparency and social reforms. An IRA portal would actually reduce federal tax expenditures on each eligible project or business. This tax tweak alone could revolutionize social investing, along with civic engagement.
  • Amend the tax code and IRS regs to require that minorities receive at least 40 percent of total employee compensation paid by the benefitting OZ companies; allow company growth outside the zone if its OZ-based payroll and its minority workforce also both expand proportionally; require comprehensive, transparent reporting by investors; simplify and encourage investment by angel investors and funds in eligible minority business startups; and allow OZ funds to park cash in tax-exempt municipal money market funds between deals to eliminate impractical deadlines for recycling capital.
Congress needs to promptly clean up this tax sham. The disproportionate impact of the COVID-19 pandemic on low-income minority households begs for this immediate fiscal policy response. Then politicians can honorably rebrand these districts as "Opportunities Matter Zones."


Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.

Girard Miller is the finance columnist for Governing. He can be reached at millergirard@yahoo.com.
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