Professor Calvin Johnson of the University of Texas recently trashed an innovative tax program with an article in Tax Notes titled Repeal Opportunity Zones (available on SSRN). His thesis is that OZ projects must destroy affordable housing and increase tenant rents.
The Billionaire And The 501(c)(4)
Much credit for OZ becoming law goes to billionaire Sean Parker, who was looking for a way to allow those left behind to benefit from investor capital. Parker backed the creation of the Economic Innovation Group(EIG) to be independent, bipartisan, and pragmatic - "basically representing the poor people in America". Professor Johnson seems to think that Parker and EIG should be making reparations.
Opportunity Zones are census tracts designated by state governors. They must have a poverty rate of at least 20% or median income below 80% of the state or metro area. 5% of the census tracts can be contiguous to a qualifying tract as long as the income of that tract is not more than 125% of the contiguous tract.
It is complicated. Census tracts are defined based on how many people live in them, so they can be of widely disparate size. New York City with 303 square miles has 307 opportunity zones. Wyoming with 97,914 square miles has 25.
All in there are over 8,000 opportunity zones in the country. The program has not been running very long and the plague has definitely put a crimp in things. So it is probably way too early to attempt to determine whether the program is overall good, bad, or indifferent when it comes to helping those left behind.
Professor Johnson cites an article by Dees Stribling A Yacht Club, Michael Milken And Tesla: Meet 10 Of The Nation's Swankiest Opportunity Zones to support his thesis,
Mr. Lettieri followed up with a list of projects that tends to contradict Professor Johnson's notions that OZ designation might be bad for the poor people living in a census tract. For example, there is:
Philadelphia, PA: Black-owned development firm, Mosaic, is developing a mixed-use project in one of the city’s most distressed communities. The project includes affordable homes, and new retail including a grocery store, bank, healthcare center, and restaurant. The developer worked with an online crowdfunding platform, Small Change, to offer a sidecar equity fund that allowed community members to make small-dollar investments and earn a return alongside other investors.
Both stunning success stories and tales of fraud waste and abuse are by necessity anecdotal. As I mentioned there was an important part of the Investing in Opportunity Act that was left out when it was incorporated into TCJA. Here it is in part:
(c) Report To Congress.—The Secretary of the Treasury, or the Secretary’s delegate, shall submit a report to Congress on the opportunity zone incentives enacted by this section beginning 5 years after the date of enactment of this Act and annually thereafter. ......... The report shall also include an assessment of the impacts and outcomes of the investments in those areas on economic indicators including job creation, poverty reduction, and new business starts, and other metrics as determined by the Secretary.
In its report Opportunity Zones Improved Oversight Needed to Evaluate Tax Expenditure Performance, the Government Accountability Office (GAO) notes the lack of means to evaluate the program.
Compared to some other community development tax expenditures, OZ generally has fewer limits on the project types that can be financed and fewer controls to limit potential revenue losses. While OZ can generally be used to support investment in any type of tangible asset class within a Zone, some other tax expenditures, such as the Low Income Housing Tax Credit, are targeted at specific project types. OZ is also not subject to limits on the aggregate dollar amount that can be claimed, unlike the New Markets Tax Credit.
Congress did not designate an agency with the responsibility and authority to collect data, evaluate, and report on OZ performance. GAO has previously reported that the Department of the Treasury (Treasury) could be the most appropriate agency to evaluate any tax expenditures that do not have logical connections to program agencies. GAO has also previously reported that achieving complex outcomes can benefit from collaboration among agencies. A member of an interagency council has issued a report estimating the effects of OZ, but the long-term future of this council, including any plans to continue evaluations over the duration of the tax expenditure, is uncertain
In my discussion with Mr. Lettieri, he indicated that EIG is hopeful that monitoring and measurement will become part of the program as Congress acts to reform it.