Are opportunity zones economic development or subsidized gentrification?
Opportunity zones offer tax incentives for those who choose to invest in distressed communities, but there is little oversight of how money is spent and the effect it has on communities
The York Dispatch
By Logan Hullinger
YORK, Pa. — York City Mayor Michael Helfrich's administration has touted its five federally designated opportunity zones as a potential boon to impoverished neighborhoods and a boost to local economic activity.
But where the Democratic administration sees economic gains and neighborhood improvements, others see a different opportunity for wealthy developers: reaping the benefits of substantial tax breaks with little oversight.
The way we frame it is that there are different buckets of flaws in the program," said Samantha Jacoby, senior tax legal analyst at the Center on Budget and Policy, a Washington, D.C.-based left-leaning think tank. "And they all sort of stem from the nature of the incentive as being fundamentally centered around capital gains appreciation."
Capital gains are a return on investments. In the U.S., a tax is levied on capital gains from investments such as stocks, bonds and real estate. Wealthy investors seek to grow these gains as much as possible.
Opportunity zones, which entitle investors to capital gains tax cuts and deferrals to put money into them, are a relatively new phenomena, though states have toyed with similar models for decades.
They were created by the Tax Cuts and Jobs Act of 2017 that was signed by President Donald Trump.
Municipalities may apply for certain areas to be designated opportunity zones — subject to the governor's approval — if the zones have a poverty rate of at least 20% or have 80% or less of the statewide median family income in the state's nonmetropolitan or metropolitan areas.
York City's five opportunity zones are the only ones in York County. There are two aspects of the law that are meant to appeal to a city battling blight and poverty.
The first aspect of opportunity zones is much less controversial. That entails giving grant applicants priority consideration if the applicants intend to improve one of the impoverished zones.
Where concern arises, some experts say, is the capital gains deferrals and tax breaks offered to wealthy investors who could gentrify neighborhoods through investments that are anything but altruistic.
For example, a wealthy investor could throw funds into building luxury condos in a poor neighborhood. Such a move could make living expenses unattainable for the local poor, often minority communities, eventually forcing people to relocate.
Helfrich has acknowledged these risks. But he has said the potential benefits cannot be ignored in a community where nearly 36% of the residents live in poverty.
The ideal project for us and the reason that we set up the opportunity zones the way we did is to bring jobs, walkable jobs, into the city," Helfrich said.
Even if investors were to beautify neighborhoods and raise rents, Helfrich said, decreasing unemployment and bringing higher wages into those areas could bring the most important benefit of all: allowing residents to own homes, rather than rent them, giving them the ability to release themselves from the constraints of landlords.
A majority of the opportunity zones in the city would serve underutilized manufacturing buildings that once held 500 to 1,000 employees but now have maybe five to 10, Helfrich said.
The mayor teased that the city would be working with a highly rated organization to bring in social impact investors, which would help ensure that those pouring money into the city would have good intentions. He would not name the organization.
The idea of investors coming in to benefit from the tax breaks has also garnered the attention of members of the city's minority communities, most notably Hispanics and Latinos, who make up nearly 32% of the city's population.
We definitely have to be vigilant because (opportunity zones) have caused gentrification, and employees have been brought in from outside the communities," said Lou Rivera, an incoming York City councilman and founder of Latinos Unidos, a nonprofit Latino-advocacy organization.
However, there are very limited restrictions on what kind of investments can qualify for tax breaks and what a municipality can do to ensure investors come in with good intentions.
"The funds themselves and those implementing the funds don't have to report to municipal governments," Helfrich said. "There's no law that requires that. There could be 10 projects going on in York now using opportunity funds and we would have no idea."
More specifically, there is no language in the 2017 legislation requiring investors to lay out a case for how their projects are going to affect communities, said Brady Meixell, research analyst at the Urban Institute.
They also aren't required to disclose how communities are affected once the projects are underway or finished.
And the tax breaks and deferrals are plenty tempting for the potential investors who aren't subjected to restrictions. As it now stands, investors would not pay tax on 15% of their deferred capital gains for up to seven years.
For example, for a $1 million investment, investors would be taxed on $850,000. The capital gains tax for high-income individuals is 20%.
But that 15% is only temporary, as it will change after Dec. 31. After that, investors would only receive a 10% tax benefit on investments.
There are two other key benefits as well.
The law permits investors to place existing capital gains into those same funds. By doing so, they wouldn't be taxed until 2026.
Additionally, for investments held in such funds for at least 10 years, investors wouldn't pay a dime in capital gains taxes.
The numbers are clearly tempting for investors, especially when there is little oversight. But some changes could be implemented to clamp down on money-hungry individuals, Meixell said.
For one, the federal government could rule out any areas that don't meet the low-income requirements.
In New York City, for example, the city has its share of opportunity zones because of a public housing development, even though the city's median home value is about $2 million.
The government could also use a rigorous certification process to allow opportunity funds to only be used for investments that would benefit local communities, such as affordable housing or clean energy development.
And finally, the government could enact transaction-level reporting that "answers the who, what, when, where and how much of all investments made."
Similar recommendations are present in a bill written by U.S. Sen. Ron Wyden, D-Ore., in a bill that now sits in the Senate Finance Committee. There is not a companion bill in the House.
The only roadblocks threatening these changes, however, may be the current state of politics.
I don't expect any kind of large changes to necessarily go through in the current political environment, but depending on how opportunity zones shake out in the first year, depending on the sorts of projects we are seeing in communities, there could be a groundswell of political opposition," Meixell said.
(c)2019 The York Dispatch (York, Pa.)