An eight-story apartment building under construction in Portland’s Central Eastside. Photo credit: Tada Images / Shutterstock.com
On SW Taylor Street in Portland, Oregon, there is a shiny new glass-and-steel building with a fireplace in its grand lobby. Developers got approval for the posh retail and office project in 2016 and, a year later, a local gas utility inked a 20-year lease to house its headquarters there.
As it neared completion, a recently formed investment fund bought the building. That change of ownership meant the site suddenly qualified for millions of dollars in federal and state tax breaks via a then-new federal program called “Opportunity Zones,” or OZs.
A few states away, a Texas-based businessman named Jimmy Day had made millions selling rent-to-own furniture and appliance franchises. Day used the same Opportunity Zone tax break program to help launch a self-storage facility in South San Antonio.
The program that helped both investors save millions on their capital gains tax liability was quietly tucked into the 2017 Tax Cuts and Jobs Act. Often referred to as the “Trump Tax Cuts,” TJCA slashed tax rates on corporations and wealthy individuals; the GOP at the time controlled the presidency, House, and Senate. TCJA passed without a single Democratic vote and was never the subject of a public hearing. By offering tax breaks on capital gains earnings, the storyline went, the new program would encourage wealthy investors to put their money into historically disenfranchised neighborhoods, reducing poverty and helping small businesses.
If neither of the aforementioned projects sound like they match that description, welcome to the reality of Opportunity Zones.
As David Wessel chronicles in his new book, Only the Rich Can Play: How Washington Works in the New Gilded Age (Public Affairs 2021), Opportunity Zones do not seem to be working as touted. But for wealthy investors, they’re working exactly as designed.
Wessel, a former Wall Street Journal journalist and now the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, works diligently to provide a complete and balanced picture of Opportunity Zones. But OZs’ lack of transparency (more on that later) makes that task next to impossible.
Opportunity Zones were the brainchild of Sean Parker, who made a fortune off Napster, a music streaming site known for its dubious file sharing practices in the early 2000s, and as Facebook’s first president. Parker sought to minimize his capital gains tax liability on his tech-stock fortune.
His idea to use the gains for (in his mind) a greater social good had irresistible appeal in the tiny circle of rich and powerful people involved in shepherding it forward.
“Every state would get a piece of it. It would be wrapped in do-good-for-the-poor packaging. Wealthy, tax-averse, campaign-contributing constituents would benefit. Ribbon cuttings and press releases for politicians would proliferate,” Wessel wrote. “And because of the way Congress keeps its books, it wouldn’t appear to cost as much as it truly did.”
Parker’s quick success with getting the program enacted is chronicled in Wessel’s book in detail—from a small, alcohol-infused dinner to passage in four short years (it helps to be a billionaire)—but of particular importance is what happened as the OZ provision sprinted toward inclusion in the 2017 Tax Cuts and Jobs Act. The provision wasn’t in the House version at all, and the Republican-led Senate was focused on passage of the much bigger cuts, so it stripped from the final OZ language a critical provision: disclosure of outcomes, such as jobs created, new business starts, or housing units built and at what levels of affordability.
In other words, data that could have enabled the public to track OZ community benefits were never collected. No one could document whether rich developers made any meaningful contributions to poor communities.
Meanwhile, as the program evolved and its regulations were issued, it became more “taxpayer-friendly.”
Wessel gives numerous examples of this—including the change-of-ownership loophole the Portland project used, how self-storage facilities with low-to-no job creation got included in an anti-poverty program, and longer investment time windows (justified by the pandemic).
Many OZ projects Wessel writes about also benefitted from significant local and state economic development subsidies. A DoubleTree by Hilton hotel in Tucson, Arizona also got a local property tax break and a state sales tax break. Some incentives don’t allow double-dipping with municipal bonds but OZs have “no prohibition with using this with any other incentives,” explained Marc Schultz, the attorney involved in the hotel, “so it obviously would be malpractice for a developer not to consider other incentives.”
Wessel provides numerous examples of questionable OZ projects: a yacht marina, a waterfront mixed-use project, and upscale student housing. He follows each example this way: “Don’t blame the players, blame the game.”
But games do not simply appear out of thin air. People design games, set their rules, and decide on their outcomes. In the case of Opportunity Zones, the game-makers were a billionaire looking to keep a bigger share of his tech-stock gains, real estate and other corporate players (corporations’ capital gains are also sheltered by OZs), and Trump administration officials who chose to implement rules that favored the interests of the rich every step of the way.
The uber-wealthy, as Wessel notes, are not nearly as interested in broader social gains as they are in protecting dynastic wealth and securing high returns on projects. Hence, their preference for high-end projects in gentrifying communities.
To be fair, Wessel cites a handful of laudable OZ projects: a $500 million OZ fund in Los Angeles seeking to help create wealth for residents, with plans to offer at-cost residences and incubate budding businesses; a couple in Brookville, Indiana, opened a 45-room hotel and bought three local newspapers that had been struggling; an insurance company in Erie, Pennsylvania, pledged $75 million in OZ funds to invest in the town. Although these projects involve social good, it is difficult to gauge their total impact.
The good news? As best as Wessel could tell, OZ’s perhaps haven’t siphoned off as much public money as projected—ironically, because the tax breaks aren’t generous enough!
Only the Rich Can Play is the latest evidence that trickle-down investments don’t work in economic development. It also supports those who argue that the funds would be better used for education, infrastructure, and public health that benefit all employers.
Day, the self-storage builder, defended his project as a “legitimate social purpose,” asking, straight-faced, whether people in South San Antonio should be “sentenced to impoverishment and denied the nicer things in life that they have in the better suburbs.”
A self-storage facility most certainly won’t help a depressed community thrive. It would be far better to support real community needs like affordable housing, which is exactly what the current Build Back Better legislation does, by preserving public housing units, investing in new affordable and supportive housing and expanding the Housing Choice Voucher program. It also significantly cuts child poverty by expanding Child Tax Credits.
Now those are real zones of opportunity.
Arlene Martínez, a former journalist, is communications director for Good Jobs First, a nonprofit policy and resource center that tracks the use of economic development incentives. Find her on Twitter @avmartinez.