5 questions with David Wessel: Opportunity Zones, a Rich Man’s Game

The Opportunity Zones (OZ) program was quietly tucked into the 2017 Tax Cuts and Jobs Act – without a single public hearing. There, it joined a score of other tax breaks that disproportionately benefit high-income people and the real estate sector in particular. Corporations have also been OZ big winners.

Opportunity Zones provide federal capital gains tax breaks, supposedly to encourage wealthy investors and corporations to invest their pre-tax gains in historically disenfranchised neighborhoods, help grow local economies and ultimately, improve the long-term prospects for zone residents.

But as David Wessel shows in his book, Only the Rich Can Play: How Washington Works in the New Gilded Age, that hasn’t been the case. Despite limited data (the enabling legislation for OZs has next to no guardrails or meaningful reporting requirements), Wessel gives numerous examples of how the winners of the OZs have often been affluent communities and already-in-the-works projects.

Wessel didn’t ignore the good OZ projects – just turns out, there are so few of them that by the end of the book it was hard to point to many.

Read our Frequently Asked Questions about Opportunity Zones

Wessel, a former Wall Street Journal columnist and now the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, answered my questions about Opportunity Zones by email from Washington, D.C.

Q: What was the most surprising thing you learned while you were out reporting your book, or since the book was published?

A: There are lots of little tidbits: the office tower in Portland, Ore., that qualified as an OZ investment even though it was fully financed, built, and leased before the Tax Cuts and Jobs Act passed, but hadn’t yet secured a certificate of occupancy, or the fact that high-end student housing apartments in university towns like Champaign-Urbana qualify because the census tracts in which they are located show up as “poor” since students have no income.

Bigger picture what surprised me (and shouldn’t have) is how large, creative, and persistent the industry of tax lawyers, accountants, wealth advisers, and fund managers are at identifying and exploiting weaknesses in the tax code to save their wealthy clients money on their taxes.

Q: What sense did you get of the intentions of Napster’s Sean Park, the mastermind of OZs? And while we’re talking Parker, how come he hasn’t invested in any OZs?

A: I conclude that Sean Parker was well-intentioned. Like others in Silicon Valley, he is convinced he had a better idea than the anti-poverty experts in Washington. I think he was arrogant (in that he resisted advice to tighten up the rules for OZs) and naïve (in that he failed to under the aggressiveness of the tax-avoidance middlemen). Parker understood that if he put his own money in an OZ fund, we in the press would accuse him of pushing a tax provision that saves him money on his taxes. So he didn’t invest, though he is very happy that many of his peers did.

Q: Should OZs should be repealed or are there ways they could be revamped and improved to truly accomplish what they were designed to do?

A: I sometimes wonder why we try so hard to tweak the tax code to get rich folks to put their money where we want them to when we could simply raise their taxes and direct the money to the places that need it, but that seems to be politically challenging (to say the least). I don’t think OZs are going to be repealed; they have a constituency, not only the wealthy investors and their advisers but state and local officials who welcome any thing that they can use to try to lure private investors.

So the best hope is to alter the law and toughen the regulations: require reporting so we can do serious analysis, sunset some of the poorly chosen census tracts, limit the things that investors can get an OZ tax break for (such as Wyden’s proposal to require any investment in housing to require a certain amount of affordable housing to quality), and somehow provide more oversight to make sure that OZ projects benefit the communities in which they are located.

Q: A lot has been written lately about the widening gaps between the country’s winning and losing regions. That, coupled with trends that show fewer people move less than they may have in the past, seem to suggest geography-based investment isn’t a bad idea. What do you think is a truly effective way to do place-based investment?

A: As the Economic innovation Group, the think tank that Sean Parker funded, has argued, geographic inequality in the U.S. is a big problem. Economists used to argue that we should invest in people, not places, and that people living in dying communities should be encouraged to move to places where they could be more productive. But it turns out a lot of people don’t want to move and fewer people are moving today than used to be the case.

So there is a role for government policy. If we are going to use tax breaks to try to steer private investment to these places, we need to be sure the resulting investments benefit the people who live in them – insisting that the investors and developers at least show how their project will do that would be a first step – but also making sure that any investment include incentives (and requirements) to train and hire local residents. I don’t have the magic bullet that will revive America’s left-behind places; I just am not convinced OZs as legislated and implemented are doing that.

Q: What happens next with OZs? Do they get repealed? Extended? Does it become another permanent real estate tax break?

A: I don’t expect repeal: They are too popular with investors and with local and state economic development officials who will take any tool that Washington offers (although a lot of them are disappointed that the OZ money they expected hasn’t shown up). Friends and foes of OZs favor reporting requirements and eliminating the zones that clearly shouldn’t have been chosen (including the infamous ‘contiguous tracts’). There are proposals to expand the number of OZs or to delay the 2026 deadline for paying capital gains tax on the profits that were initially invested in OZ funds. There are proposals to substantially limit the projects that qualify for OZ tax breaks. With so little agreement, there seems to be little prospect of any changes right now. There’s nothing in the pending tax bills, for instance, and the Biden administration has largely avoided the issue.

I don’t expect anything big to happen soon, though there’s always a chance that something will be slipped into a tax bill quietly (as the OZ provision was in 2017). The law says the OZ designations expire in 2028. I have no idea what’s likely to happen then. Tax breaks, once enacted, tend to persist, but I hope by 2028 we’ll have clear evidence where this one is working as hoped or not.