Trump tax break fails to deliver for communities, study finds
President Donald Trump recently highlighted the “opportunity zone” tax breaks he signed into law in late 2017 as a reason his administration “has done more for the Black Community than any president since Abraham Lincoln.”
A new analysis by the left-leaning Urban Institute questions if the program is meeting its goal of spurring development and creating jobs in “undercapitalized communities,” many of which are majority Black.
“It was sobering for us in terms of how hard it is to do impact projects under the program,” said researcher Brett Theodos, one of the authors of the study. It’s “not impossible, but it’s harder than it might seem, and certainly than it should be, for a program purporting to help neighborhoods.”
One of the key findings of the report is that backers of “mission-oriented” projects — which include affordable housing, arts organizations and small business development groups — are struggling to get traction with family offices and other high net-worth individuals that are taking advantage of the tax breaks. That’s partly because community development projects often have lower returns than most investors in the zones are willing to accept.
Governors selected the more than 8,700 zones two years ago from a list of eligible low-income census tracts in their states. Investors who develop real estate or put equity into businesses located inside these communities can defer or even avoid taxes on capital gains.
Getting a handle on the impact of opportunity zones has been a challenge, in large part because the federal government has required so little data collection on who’s using the tax breaks and what they’re investing in.
Detractors can highlight examples of waste, while supporters can point to ways the breaks have catalyzed development. As members of Congress weigh potential adjustments to the incentives, Theodos and his colleagues are suggesting changes to make them work better for low-income neighborhoods.
Among them: Allow investors to back small businesses in the zones through hybrid debt and other structures, rather than just pure equity; scaling the tax benefit to social outcomes, like the number of quality jobs created, rather than profit on the projects; and widening the pool of investors that can benefit through refundable tax credits.
“Although there are compelling examples of community benefit, the incentive as a whole is not living up to its economic and community development goals,” the report said. “The incentive’s structure makes it harder to develop projects with community benefit in places with greatest need. In contrast, OZs are providing the biggest benefits to projects with the highest returns, which are rarely aligned with equitable development.”