When opportunity zones became law with the passing of the Republican tax bill in December 2017, investors around the country grew excited, as most of the country focused on how the tax brackets changed for Americans and corporations. The policy, a tax break for investors putting capital into distressed communities, started as six pages tucked into the GOP tax bill but will soon have more than 500 pages of guidance and regulation.
The policy allows investors to put unrealized capital gains from other investments into a fund that fuels development in low-income areas, selected by governors. These investors receive a tax break for parking their money in the fund, and if they commit to a full 10 years, they pay no tax on their capital gains, the profit they made from cashing out.
After two years of implementation by all 50 states, Washington, DC, and five territories, the White House is nearly ready to pass the third round of regulations the IRS submitted at the beginning of this December. It was during that interval, however, that a policy with widespread bipartisan support became virtually as polarizing as any other issue in America. Critics have alleged abuse by governors and members of the Trump administration, pointing to instances of the zoning used in areas that benefit high-income residents rather than the low-income ones the policy was developed for.
The policy, born out of the Great Recession, is the result of one of the largest public-private partnerships of the past decade, and on a scale that previous tax incentive programs for development have not remotely approached. While there were 115 "enterprise zones" that came out of a '70s policy, there are 8,764 opportunity zones across the US and its territories. In October, President Donald Trump signed an executive order establishing a council that directs federal resources to some of the zones.
Now, the two senators who helped craft the policy — Tim Scott, the Republican representing South Carolina, and Cory Booker, the Democrat representing New Jersey — are debating whether the policy needs to be further reformed to maintain its focus on low-income communities, with Booker calling for change. America has tried tax-incentive-driven development programs before, but never at this level and with this much support. If it can survive the tumult of the Trump years and have loopholes closed and abuses punished through regulation, it has the potential to become one of the most widely used tools for reducing inequality across the country.
Taking Silicon Valley ethos to distressed communities
In an interview with Business Insider, Steve Glickman, one of the policy's architects, said that such allegations are coming out of a misunderstanding of what it looks like in practice, and that any potential abuses of the policy are a result of early days and "are the exception, not the rule," and will be ironed out by the upcoming rules.
Glickman is a lawyer who has spent most of his career in DC, including a stint in the first term of Obama's presidency, with a focus on economic development during the recovery from the Great Recession. He saw firsthand how manufacturing communities were among the hardest hit in the country, and said he "noticed that the problem was way bigger than the government could solve with the tools it had right now."
After leaving the White House, his friend (and future Democratic congressman representing Silicon Valley) Ro Khanna introduced him to billionaire investor Sean Parker. Parker made his name and fortune as the founder of Napster and the first president of Facebook, and said he was looking to enter a philanthropic phase of his career. Glickman and Parker found that despite their different backgrounds and motivations, they shared an interest in deploying capital to areas big time investors usually overlooked — which is virtually anywhere except Silicon Valley, New York City, and Boston.
They teamed up with John Lettieri, who had experience in both policy and business, and founded in 2013 the Economic Innovation Group to tackle the problem. Within a year, they decided that the key to doing this would be through tax breaks, where investors could avoid capital gains taxes in a vehicle that also benefitted low-income communities. As Glickman put it, capitalism is a "double-edged sword," where the impetus for self-enrichment can be utilized for the greater good.
It turned out that a lot of people on the Hill shared their vision. They found their biggest champions in Senators Tim Scott, Republican from South Carolina, and Cory Booker, Democrat from New Jersey. As the only two African-American senators at the time, Scott and Booker had previously worked on pushing policies they believed would benefit downtrodden minority communities, and they liked the idea of opportunity zones, where the opportunity was primarily for low-income neighborhoods and motivated by the opportunity for investors. It would be Scott who introduced the policy into the GOP's tax bill in 2017.
In its final form, investors receive a tax break on capital gains after five years of investment in an opportunity zone development, and do not have to pay any capital gains tax if they keep their assets in the investment for a decade.
Glickman sounded torn about the fact that opportunity zones became law when Republicans had the House, Senate, and White House, because while that unity had gotten the policy enacted in the first place, it transformed it into solely a Trump policy for certain politicians and critics.
"In reality, it's still got a lot of bipartisan support," Glickman said. He noted that every state added its own tax incentives on top of the federal ones, "which they didn't have to do." He also welcomed the scrutiny that Booker, an early champion, is now giving the allegations of abuse.
Glickman said his research has found there has been at least $10 billion invested in opportunity zones thus far, making it far more successful than other federal development programs in the past. And he shrugs off the criticism that it's a policy for the rich.
"The fact that this has proven to incentivize the wealthy people to bet on communities is a feature, not a bug in the program," he said. "The idea is to go where the capital is, which is among people with means and companies have assets and to have them focused on building businesses in other places that they're not looking right now."
He wants to see the program become a regular part of the way the US works, where opportunity zones are renewed every 10 years. The hope is that it outlives a particularly polarized moment in history, and becomes a go-to tool for addressing inequality, where the benefits of economic growth don't become concentrated on the coasts.
"What's happening between San Francisco and New York, LA and DC, and big city and small town America," he said, is "you just don't see the economy in the same way, because it's just not working for them in the same way."
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