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A Tax Cut for Gentrification

Sign in an alley off of 18th Street, Pilsen.

In 2013, early investor in Facebook Sean Parker bankrolled a lobbying effort that pairs a capital-gains tax break with an incentive to invest in distressed neighborhoods. Each state chooses areas that are “distressed,” often defined by high unemployment and poor quality housing, and wealthy investors are encouraged to develop projects in these “opportunity zones” that would spur economic growth and reduce poverty. The bill is the Trump administration’s attempt to revitalize neighbourhoods that have long struggled to draw in investment. As high-profile investors rush to qualify for the tax break, critics are concerned about who the bill is helping.

Sponsored by Parker’s Economic Innovation Group, Parker’s bill passed Congress and gained support from Senators Cory Booker, Democrat of New Jersey, and Tim Scott, Republican of South Carolina. Known as the “opportunity-zone” tax break, the bill was implemented in President Trump’s Tax Cuts and Jobs Act of 2017. Investors of stock markets and real estate funds, which otherwise could be subject to 41 percent tax rates once sold, may defer paying taxes until 2026 and lower their capital gains taxes. Individuals can delay capital gains taxes on any investments sold, as long as these investments are funneled into certified areas. All profits from the projects are not subject to tax.

President Trump cites this program as part of his national outreach to rural and urban “left-behind” communities. While Ja’Ron Smith, deputy director of the White House Office of American Innovation, claims that this tax break targets private sector money in a creative way, the law does not specify how investment could be used. Affordable housing projects, high-end apartments, or luxury malls could all receive the tax break. Thus far, business financiers like Leon Cooperman, Sidney Kohl, and President Trump’s advisers and family have been the primary beneficiaries of the tax cut. Various elite investors, such as Former New Jersey Gov. Chris Christie and Jared Kushner’s family, are all planning projects. Many of these were well underway before the 2017 provision, but firms are rewarded with tax cuts nonetheless.

In the Warehouse District of New Orleans, a trendy and bustling neighbourhood, former White House aide Anthony Scaramucci’s development  project involves a luxury hotel with a rooftop pool and restaurant. In Houston, the tax benefit helps finance the tallest residential building in downtown, complete with a glass-wrapped outer surface. In Washington, D.C., a city experiencing gentrification and African American displacement at one of the nation’s highest rates, investment projects have increasingly come under scrutiny for targeting the wealthy; development pushes out low-income residents and replaces them with whiter, wealthier neighborhoods. For example, MidCity Financial Corporation has been developing near Rhode Island Avenue, an area where unemployment is at 28% above the city’s average but increasingly gentrified. One Midcity project is the Brookland Manor/RIA, which was planned long before the opportunity zone designation. Planning had been in the works since 2015, as shown by DC Zoning Commission’s documents, and proves the tax cut designated in 2018 did not incentivize the project’s beginnings but merely benefitted the corporation. Moreover, RIA is supposed to be built on the site of Brentwood Village Shopping Center, which was demolished in 2016. Brookland Manor itself, which was built in the 1940s, was scheduled to be demolished in 2019 but is now on hold due to appeals from its low-income residents who fear displacement. They support renovation but advocate that all 535 units of existing affordable housing remain, and demand subsidies for tenants who make less than the area median income.

The designation of some of the areas as needing economic development has been called into question. For an area to be eligible, the census tract must either have a poverty rate above 20 percent federally or a median family income below 80 percent of the state. Some qualifying areas that raised eyebrows were Long Island City, where Amazon’s HQ2 was planned, and South Jersey, where President Trump’s golf club resides. Similarly, in Rhode Island, Downtown Providence, Newport’s North End, Narragansett, Bristol, Warren and Kingston Village in South Kingstown all qualify as low-income opportunity zones despite many expensive real estate properties. On the other hand, poorer areas around McCoy Stadium in Pawtucket, most of South Providence, and Central Falls did not qualify as opportunity zones. Indeed, an Urban Institute study shows that, nationally, many designated zones do not qualify as truly low-income.

Stefan Pryor, Rhode Island Commerce Secretary, explained the designation process involved local leaders and considered growth potential: “We reached out through the League of Cities and Towns and directly to cities and towns,” Pryor said. “We also took into account the potential for investment to occur; the potential to attract business expansion, startup creation and business development.”  Since the federal government assumes the cost of the tax break, states are eager to embrace this program. Matthew Turner, an economics professor at Brown University, concluded that while the program may be an ineffective way for the federal government to fight poverty, from the state perspective, choosing areas more likely to draw investors makes sense. Turner said, “From the point of view for Rhode Island it is a win, because it allows us to collect money that would have gone to the federal government, but it will go mostly to landowners,” Turner said. “As a tool to help disadvantaged people it is not efficient. They chose to pick census tracts that were likely candidates for investment anyhow, so this will give them a little bump to make them more attractive.”

Despite the current buzz, opportunity zones are not a new concept. In the 1980s, the UK-inspired “enterprise zones” concept moved to the US. The goal of enterprise zones, however, was to provide tax cuts to individuals starting their own businesses, as opposed to any developer starting a project in the designated area. In 1993, Congress enacted “empowerment zones,” allowing local governments to compete for tax cuts. Yet, opportunity zones seem to veer away from those goals — rather than attracting smaller, individual based grants, opportunity zones attract large-scale investment that has potential to further displace and gentrify low-income areas.

According to the Congress’ Joint Committee on Taxation, the bill will cost the government $1.6 billion in lost federal revenue over ten years, and will cost much more to maintain after the first decade as the most generous breaks won’t materialize until 2026. Yet, some disadvantaged communities are receiving investments: a developer in Birmingham converted a vacant building into apartments to house the local workforce, and Goldman Sachs is investing some of its capital gains in mixed-income housing developments, including a $364 million investment over several locales.

While some money is being funneled toward truly distressed areas, many other projects have used these opportunity zones to avoid taxes on pre-planned developments which cater to a wealthier clientele. Since the law is primarily used to create tax breaks for wealthy investors, there are almost no requirements about development projects and how (if at all) they must benefit the local residents. The effects of opportunity zones may not be apparent in the short-term, but thus far, investors have abused the tax code and have been accumulating tax benefits, leading to potentially gentrifying effects for low-income areas.

Photo: Image via Eric Allix Rogers (Flickr)