Opportunity Zones: The Path Toward Economic Justice?

6/23/20

The Black Lives Matter movement calls for racial justice with two, related yet distinct focus areas. One is criminal justice and the other is economic justice. The concept of allowing tax benefits to those who invest in “Opportunity Zones” would seem to be a policy designed to ameliorate some measure of this economic inequity.

By way of background, Opportunity Zones (OZs) are specific geographic areas nominated by states and approved by the IRS, where new investments would qualify for preferential tax treatment. The program was codified under the 2017 Tax Cuts and Jobs Act signed by President Trump. The first OZ was designated in April 2018, but as of January of this year, more than 8,700 such zones have been come into being across the US.

The investment itself has to be set up as Qualified Opportunity Fund (QOF). At the start, the investor who sets up this vehicle would get to defer paying tax on realized gains generated from other, previously held assets, provided those gains are reinvested in a QOF within 180 days. Then, depending on the duration of the investment, as much as 15 percent of the tax on the deferred gain could be forgiven. The deferral would terminate, however, no later than December 31, 2026.

Deferring a tax payment effectively serves as an interest free loan to the investor, in this case with the possibility of forgiveness for a relatively minor portion of the gain. But wait… The real value to the investor arises if the investment is held for 10 years. With that requirement satisfied, all gains on the qualified investment become tax free. Investors would still have to pay the tax on the original gain (less any forgiven component) that served as the seed capital for the QOF investment, but any appreciation in the QOF, per se, would be untaxed. Admittedly, investors are putting their capital at risk, and they’re committing their capital for 10 years, but still — tax free!?! That’s crazy.

While tax policy is often used to create incentives to foster some desired social end, a good portion of such tax benefits are wasted in that many businesses would have made the desired investments even without the subsidy. I ran into this phenomenon when I was writing a dissertation. My thesis sought to measure the impact of federal subsidies (paid to builders) for the construction of low-income housing. The analysis concluded that about half of the housing units built under the subsidy program would have been built anyway, without the subsidy. That same thing is likely to be happening here.

We should appreciate that while this program is seemingly available to any willing investor, think about who has the capacity to lock away funds for 10 years. Answer: rich people. Are these the people who should be recipients of tax benefits? This is just another example of trickle-down economic policy that inappropriately directs public funds to the haves instead of the have-nots.

This kind of subterfuge could be avoided by providing financial assistance directly to households — i.e., Universal Basic Income (UBI). With sufficient resources allocated, UBI would be transformative, resulting improved buying power in poor communities that will provide the financial incentives for new businesses to enter these zones to meet an expanded set of demands. UBI would be the fastest and most direct path toward reducing income insecurity, while in all likelihood also serving to lower crime, improve health, and generally enhance the dignity of the recipients. These benefits can only help to lower racial tensions, as well. The refrain that we can’t afford a UBI program is a canard. America is the richest country in the world. Without UBI — or without some other mechanism to level the economic playing field — true justice will elude us and we’ll be fighting this battle for decades to come. UBI may not be a panacea, but it will surely put us on the right track.

[For more on the concept and design of Universal Basic Income see https://medium.com/@igkawaller/bring-on-universal-basic-income-863bd871422d.]