Enriching the rich: Trump’s opportunity zones

Another tax break for the wealthy sold as an economy-boosting innovation that will help the poor. We deserve better.

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President Trump signs the Tax Cuts and Jobs Act, including Opportunity Zone provisions,            on Dec. 22, 2017

Stand in front of the vacant building at the corner of S.W. Pacific Hwy and Dartmouth St. in Tigard and you’ll be enveloped in activity.

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11688 Pacific Hwy, Tigard

The traffic is heavy and constant. Nearby businesses include Costco, a thriving Car Toys store, a bustling shopping center and numerous restaurants. It doesn’t look much like an under-invested, economically distressed area badly in need of economic development and job creation.

But the building on the corner, 11686 S.W. Pacific Hwy, is in one of Tigard’s three “opportunity zones.” All are tax-advantaged sites added to the tax code subsequent to President Trump signing the Tax Cuts and Jobs Act on December 22, 2017.

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Tigard’s Opportunity Zones (in dark blue)

The idea, proposed by Sen. Tim Scott (R-SC), was that high-poverty areas/distressed communities would get a leg up with new investments if they were eligible for generous preferential tax treatment. The program was originally proposed in the Investing in Opportunity Act, which Sen. Scott co-sponsored with Sen. Cory Booker (D-NJ) earlier in 2017. The program allowed investors to reduce and defer paying capital-gains taxes if they invested in a qualified opportunity zone fund which invested in an opportunity zone.

“The rich will not be gaining at all with this plan,” the president told reporters prior to a Sept. 2017 White House meeting with the bipartisan Congressional Problem Solvers Caucus.

Areas can qualify as opportunity zones if they have been nominated for that designation by the state and certified by the Secretary of the U.S. Treasury via the Internal Revenue Service.

Investors in a zone earn a 10% tax discount on their gains after five years, then a 15% discount after seven years. If they keep their opportunity fund shares for 10 years, they can sell them without paying any taxes on the money they made from that investment.

But investors have to act fast because to get the greatest potential tax break they need to leave their money in a fund by the end of this year. Under the law, they can defer paying taxes on their initial investment only until 2026. That’s motivating many investments in projects planned well before opportunity zones were designated.

“With Opportunity Zones, we’re drawing investment into neglected and underserved communities of America so that all Americans, regardless of ZIP code, have access to the American dream,” Trump said on Dec. 12, 2018.

But things got off on the wrong foot when real estate experts got hold of the law.  “…what we were greeted with, and I don’t think it’s unfair for me to say this, were eight pages of the most poorly written statute that I’ve come across in my time covering tax policy,” said Tony Nitti, a CPA, currently a Tax Partner with RubinBrown in Aspen, CO. and a Senior Contributor to Forbes.

It took almost a year after the Tax Cuts and Jobs Act became law before the IRS published a lengthy list of proposed regulations on Oct. 19, 2018.

Then the IRS had to address more questions with a second set of 44 pages of proposed regulations on May 1, 2019.

Another problem that has emerged is that not all of the country’s 8,764 certified opportunity zones encompass just under-invested, economically distressed areas badly in need of economic development and job creation. Some also include areas of relative affluence that would be ripe for investment even without the new tax break.

As Samantha Jacoby, a Senior Tax Legal Analyst at the Center on Budget and Policy Policies, a progressive think tank,  has warned, the opportunity zone law is “fundamentally flawed” and the “… tax benefits will flow to wealthy investors with no guarantee that the zones will help distressed communities.”

Even the Wall Street Journal recently  highlighted this problem, noting that, “a tax benefit intended to help poor areas is channeling money to places that are already relatively well-off.”

One such place in a Tigard opportunity zone is raw land at the corner of SW Dartmouth St & SW 72nd Ave.  The 1.69 acres of commercial land in an already prosperous and heavily developed area is being offered for sale for $3,300,000 by the Real Estate Investment Group.

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Because no structure is on the land to improve, it might seem like a speculator could buy this raw land, sit on it without adding anything and then sell the land after ten years tax-free.

But it’s not so simple. An owner must conduct a trade or businessand just holding raw land is not a trade or business. So the purchaser of raw land will also need to invest in substantial improvements on the property, though the owner would not be bound to as specific an amount of improvements..

It would also be quite a stretch to call 11646 S.W. Pacific Hwy, a 29,978 sq. ft. site with a vacant 11,260 sq. ft. building that’s for sale at the corner of S.W. Pacific Highway and Dartmouth St., “economically distressed.”

Marketing material for the site has highlighted that average household income was $71,601 within one mile and $89,792 within three miles in 2015. The material also points out that the site is in the middle of a bustling commercial area that includes retailers such as Costco, PetSmart. A Walmart Supercenter, WinCo Foods and Fred Meyer.

Some readers may remember when the building on the site was occupied by Magnolia Hi-Fi.  The building was constructed in 1996 and NTN Pacific, LLC bought the site from Toyama Hawaii Corp. for $3,100,000 on Jan. 7, 2004 It’s now being offered for lease or sale through Norris & Stevens, Inc.

The buyer of this property won’t automatically qualify for the opportunity zone tax benefits. Since the goal of the program is to improve distressed communities, substantial improvements will have to be made to the property within 30 months.

To be precise, the new owner will have to spend on improvements an amount at least equal to the purchase price of the building. If 60% ($1.5 million) of a $2.5 million purchase price is allocated to the building’s value and 40% ($1 million) to the land’s value, the purchaser will have to invest an additional $1.5 million on substantial improvements, such as redeveloping the building and building out spaces for incoming tenants.

One of Tigard’s stated objectives in creating opportunity zones was to spur the development of more affordable housing.  Tigard is considered a rent-burdened city with over 28 percent of residents spending over 50 percent of their income on rent/mortgages.

But it would be a mistake to assume new housing being built in Tigard’s opportunity zones will address this problem. For example, The 72nd, a 38-unit apartment building that’s under construction on S.W. 72ndAve. will be far from affordable housing.

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The 72nd apartment complex under construction in a Tigard opportunity zone.

A 517 sq. ft. one-bathroom studio at The 72nd will start at $1263 a month; a 690 sq. ft. one-bedroom one-bathroom apartment at $1534 a month. And rents go as high as $1,776 a month for a one-bedroom one-bathroom apartment.

And then there’s the impact of the opportunity zone tax breaks on federal and state tax collections.

The new tax breaks will cost an estimated $1.6 billion in lost federal revenue over ten years, according to Congress’ Joint Committee on Taxation.

At the state level, all the tax breaks lower individuals’ and corporations’ “gross income,” as the Internal Revenue Code defines it. If states piggyback on that definition, as most do, the breaks will automatically flow through to state individual and corporate income taxes unless the state proactively “decouples” its law from the opportunity zone provisions. Without decoupling, states will miss out on collecting revenue needed to fund other priorities needed for healthy economy.

As the Oregon Center for Public Policy, a left-leaning think tank, put it, “Someone will have to pay for the subsidies going to the wealthy investors profiting from Opportunity Zones, and that someone will be schools and essential services.”

So it’s not cynicism to see the opportunity zone program as yet another misguided giveaway. As Caesar proclaims in David Staller’s adaptation of “Caesar and Cleopatra,”  “The power of accurate observation is commonly called cynicism by those who have not got it.”.

Welcome to opportunity zones — tax shelters for wealthy investors and real estate developers who can put their money to work in areas the least in need of assistance, reducing state and federal tax revenues and increasing already excessive federal deficits.

Another well-intentioned program gone awry.

 

 

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