The right fix for opportunity zones

The Tax Cuts and Jobs Act of 2017 created a boon for real estate investors and developers in the form of “opportunity zones.” The idea was to use tax breaks to incentivize real estate development in low-income communities. Barely two years later, Congress is considering multiple proposals, from Republicans as well as Democrats, to reform the program. And one congressmember wants to outright kill it.

Opportunity zones are simple in theory. By motivating more investment in low-income areas, one might expect them to help create jobs and reduce poverty. In reality, they have often been twisted to serve political purposes rather than improve public welfare.

In the two years following the tax law’s passage, news outlets have uncovered numerous examples of census tracts being designated as opportunity zones under suspicious circumstances. It should not come as a surprise, then, to find a lot of places (and people) that aren’t poor reaping the benefits.

Consider how areas were designated as opportunity zones: After officials at the Treasury department decided which of the nation’s nearly 75,000 census tracts were eligible, each state’s governor picked 25 percent of its eligible tracts to receive the designation. The law also allowed governors to select some non-impoverished areas adjacent to low-income communities.

Such discretion is problematic because it allows politicians to play favorites. And when politicians play favorites, they will inevitably do so with disproportionate input from well-heeled lobbyists and powerful special interests looking to capitalize on their political influence. 

Indeed, there’s good evidence that a lot of political privilege-granting has been happening already. There are dozens of professional sports stadiums and arenas (many already financed by local and federal taxpayers) located in opportunity zones. If billionaire sports team owners really need the financial aid, it’s only to keep up with their already-subsidized billionaire competitors.

Furthermore, anecdotal evidence suggests that many of the projects that will qualify for an opportunity zone tax break would have been undertaken without the benefit, meaning that other taxpayers are paying a larger share of taxes for no reason.

Just because an eligible project is in a qualifying census tract doesn’t mean that it will benefit a low-income community. In fact, there are no provisions in the law that mandate that investments are made to benefit low-income people. Many projects are located in wealthier enclaves within an opportunity zone and targeted toward wealthier populations. And because the value of the tax break will be capitalized into land values, the landowners are reaping a bounty. 

The steady drumbeat of negative press from across the country even has people who support opportunity zones suggesting legislative fixes and reforms. But isn’t that what Washington always does?

When a program that is susceptible to excessive influence-seeking inevitably sprouts warts, the solution is almost always to “reform” it. When those reforms sprout their own warts, new calls emerge for further reform. Each round is an opportunity for those with political influence to twist the legislation further to their advantage, or for more unintended consequences to occur.

Ronald Reagan famously quipped that “a government bureau is the nearest thing to eternal life that we’ll ever see on this earth.” But there is one sure-fire way to fix programs that invite favoritism and inequality: Repeal them. And, because politics makes for strange bedfellows, Rep. Rashida Tlaib (D-Mich.) has introduced legislation to do just that. Her bill would simply do away with the opportunity zones by striking the relevant provisions from the 2017 tax bill, rather than tinkering with an institution that by its very nature invites cronyism.

You need not share Rep. Tlaib’s progressive politics to share her distaste for corporate handouts. Nor must you share our economic preference for free markets (though you might note that our research shows that political giveaways both cause economic harm and undermine the public’s trust in our political institutions). 

As Frederick Douglass said, “I would unite with anybody to do right; and with nobody to do wrong.” In an era of hyper-partisanship and binary clannish thinking, good ideas should be applauded, especially when they create an opportunity to build bridges and work together. 

Tad DeHaven is a research analyst and Michael Farren is a research fellow with the Mercatus Center at George Mason University.