The median wealth of a white family is $171,000. Among Black families, it’s just $17,600, and the gap between those two numbers has more than tripled since the passage of the Civil Rights Act in 1963. Hidden on page 135 of the 185-page 2017 Tax Bill lies an attempt to bridge this gap: the Investing in Opportunity Act, a bipartisan provision that promises to channel investment into America’s lowest-income neighborhoods using an array of tax exemptions. Everyone from President Donald Trump to Senator Cory Booker to rapper T.I. has endorsed the so-called “opportunity zone” (OZ) provision as a solution to the persisting racial divide of our time. Yet to believe in the power of free markets to heal the wounds inflicted by our nation’s past is to suffer from an acute case of historical amnesia. American capital when left to its own devices has not extended the distribution of wealth, but has instead accelerated a process of racial immiseration.
The genesis of opportunity zones can be traced to Sean Parker, Napster’s founder and Facebook’s first president. Today, Parker leads the Economic Innovation Group (EIG), a think tank which, in his own simplistic words, “basically (represents) the poor people in America.” Parker created the theory surrounding opportunity zones after he noticed that many of Silicon Valley’s overnight millionaires were facing the same issue: they wanted to diversify their portfolios, but didn’t want to pay the tax that would accompany liquidating their shares. Lamenting the untapped potential that trillions of dollars in unrealized capital gains represented, he and EIG drew up a solution.
Here’s how it works. First, investors shell their otherwise taxable capital gains into qualified private-investment vehicles called opportunity funds. These funds then invest 90 percent of their holdings in OZs, communities in which the poverty rate exceeds 20 percent or the median per capita income is less than 80 percent of surrounding neighborhoods. Taxes on the initial capital gains are deferred and reduced by 15 percent, and any return on investment accrued from the opportunity fund is tax exempt.
The social immobility which plagues low-income communities of color is not the product of any market failure, but a penetrating history of state-sanctioned segregation. Now, both Democrats and Republicans have delegated the responsibility of remediating the legacy of segregation to the savvy of Silicon Valley, and the private sector more generally, as if markets themselves have not propagated the racism embedded within our state institutions.
Our history classes often credit the wealth of our nation to the entrepreneurial spirit of Rockefeller, Carnegie, and other enlightened capitalists. But in 1840, at the height of the Industrial Revolution, the value of enslaved people exceeded that of all the railroads and factories in the nation. This was not a uniquely Southern problem; the profitability of New England’s first textile mills rested upon cheap and abundant access to slave-picked cotton. At the same time, banks began collateralizing slaves and converting their market price into tradable financial instruments. Through trading these securities, many of America’s most preeminent Northern industrialists were able to finance their earliest enterprises. Regardless of whether or not they personally took issue with the slave trade, America’s first titans of industries all benefited in one way or another from the leveraging of Black bodies as a means to accumulate physical capital.
Upon their emancipation, Black people in America faced their first barrier in the way of capital formation when General William Tecumseh Sherman of the Union Army failed to deliver on his promise of 40 acres and a mule to all former slaves. They were left with no option other than to expropriate themselves, entering exploitative sharecropping contracts with plantation owners who charged exorbitant rents and collected two-thirds of their yields. Consequently, the economic insitution of slavery remained functionally intact long after the Civil War.
In the 1930s, right after the Great Depression, the Federal Home Owners’ Loan Corporation helped establish the American middle class by offering government-insured loans. But a majority of Black families were systematically excluded from receiving the program’s benefits, since communities of color were deemed “hazardous” and thus ineligible for receiving credit. Not long after, the much-celebrated GI Bill allowed millions of WWII veterans to attend university and receive mortgages with zero down payments. Though Black veterans were not explicitly barred from receiving these benefits, the banks that underwrote the VA’s loans refused to issue credit to Black veterans, citing risk and uncertainty. History would repeat itself in 2008, since Black and brown families were twice as likely to receive high-cost subprime mortgages compared to white households of comparable incomes. As a result of discriminatory bank lending practices, the financial meltdown disproprotionately devastated low-income communities of color.
In each of the aforementioned instances, capital did exactly what any rational economist would expect it to: it sought the path of least resistance. The market’s awesome potential and innovative capacity lies not in maximizing social equity, but profits.
Investreal, a real estate marketplace, recently created a database which allows investors to channel their savings into the “safest” opportunity zones. It identifies low-risk investments where distortions in census data, such as college towns which appear on paper as low-income due to high student populations, technically qualify affluent neighborhoods as opportunity zones. A new industry of “opportunity zone advising firms” has risen, pitching OZ funds to clients as enticing tax breaks and perverting the provision’s purpose. Jack Sullivan of the Emergent Development Group, one such advising firm, described opportunity funds as “the greatest tax benefit offered by our government in my career.” It seems that OZs present a greater opportunity for wealthy investors than for the wealth-deprived communities the provision alleges to assist.
Since OZ funds are not mandated to appropriate any percentage of their returns towards local community members, any capital that’s generated will likely return to investors’ pockets as soon as it is accumulated. In the two years since the 2017 Tax Bill, opportunity funds have financed an array of high-end corporate office spaces, hotels, and luxury apartment complexes. These projects don’t add secure, long-term, wealth-generating jobs to the communities they enter. Instead, they drive out local families by raising rents and expedite a process of gentrification that low-income families in New York, Boston, Chicago, and San Francisco know far too well. Sure, opportunity funds could potentially “develop” a neighborhood in that the absolute quantity of capital invested within the area increases along with the number of a few low-wage jobs. But this kind of “development” comes at the cost of massive social dislocation and cultural erosion.
We Americans have long found solace in the consecrated promises of meritocracy. We attribute the wealth of so-called self-made men to their grit, prudence, and initiative, and consequently, the abjection of the impoverished to their sloth, negligence, and mediocrity. In truth, however, our future earnings are far less determined by our competencies than by our zip codes. History has shown time and time again that color-blind, market-based solutions are incapable of addressing problems created created by aggressive government intervention and segregation. Opportunity zones are just the latest iteration of this phenomenon. The time is up for hiding behind the race-neutral invisible hand of the market to justify our blood-stained institutions. No longer can Americans purge themselves of the moral imperative to face the contradictions of the union’s prosperity. America’s ghettos were categorically excluded from accumulating human, physical, and social capital. Describing them as “niche” and “emerging,” fitting them with a couple of luxury high-rises, and crowding them with millenials working for tech startups does nothing to address years of intergenerational capital exclusion.
Photo: Image via Rick Harris (Flickr)