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On paper, the idea behind the Opportunity Zones program – a lesser-known provision of the 2017 Tax Cuts and Jobs Act – seems sound: help economically distressed areas around the country by delivering special tax advantages for certain investments.
In practice, however, similar programs haven’t worked out as intended. Before expanding the program, as some members of Congress and state legislatures have proposed, lawmakers should wait to make sure Opportunity Zones yield results absent from past programs.
Broadly available tax cuts benefit all Americans, especially the most vulnerable, through a strong economy that generates demand for workers and raises their wages through productivity gains. But targeted development programs similar to Opportunity Zones fail to help those in need. In fact, they have a history of unintended consequences and corruption.
TRUMP ADMINISTRATION SEEKS TO BOOST OPPORTUNITY ZONES
Good intentions aren’t enough. Subsidies from Washington fail to address the underlying causes of concentrated poverty – causes such as lack of educational choice, restrictions on worker freedom, and onerous local regulation and mismanagement.
The gleaming luxury apartment buildings, high-tech industrial parks, and designer shopping centers constructed in these zones generally serve individuals who are already thriving. Place-based economic planning won’t help those saddled with more complex institutional problems.
Good intentions aren’t enough. Subsidies from Washington fail to address the underlying causes of concentrated poverty – causes such as lack of educational choice, restrictions on worker freedom, and onerous local regulation and mismanagement.
For example, workers without adequate skills will not suddenly be qualified for higher-paying jobs. Those with meager incomes will not suddenly be able to afford luxury housing.
Wide-ranging surveys conducted by federal, state and private researchers of targeted economic development programs find that these programs produce few positive results for the intended recipients. They often leave communities poorer than they started.
A series of studies find current residents of targeted areas don’t see an increase in wages following the development aid, but they do experience rising rental costs. Higher living costs without higher wages result in a lower standard of living for the communities the politicians were trying to help. A congressional report found no “general improvement in the economic conditions of the locals.”
Analysis of six state enterprise zones shows subsidies attracted new businesses which proceeded to snuff out a similar number of existing competitors employing native residents. The net impact on the number of businesses was zero. In Maryland, manufacturing jobs declined faster in the incentive zones than in the rest of the state and did not benefit zone residents.
Moreover, these programs come at a huge cost to taxpayers – in many instances exceeding $100,000 for each job created.
And this sea of government money leads to corruption and graft. Directors of the Gary Indiana Urban Enterprise Association were charged with conspiracy, mail fraud, and federal program theft of nearly $1 million. In Atlanta, targeted subsidies are connected to corruption and mismanagement, resulting in 82 percent of the programs achieving not one of their goals of helping poor communities.
Past place-based programs have relied upon complicated tax credits and direct subsidies with many government strings attached. Although Opportunity Zones share similar goals, the new program is streamlined with capital gains tax breaks on investments made through investment vehicles in 8,700 designated areas nationwide.
Commendably, the new program contains far less red tape and industry-specific favoritism than some prior place-based programs. However, these programs, by their very nature, can’t resolve the complicated institutional barriers to economic opportunity.
In addition, because politicians are empowered to decide which neighborhoods win and lose, these programs tend to breed cronyism. Often, these decisions benefit politically connected developers and investors who have rigged the system in their favor.
Something other than merit and need seems to be driving Opportunity Zones. Early evidence suggests that it is not the lowest income communities who are seeing the bulk of the new developments.
After a frenzy of lobbying in New Orleans, the central business district was designated a special zone despite it not being a low-income area. Investments that were already in the works received the special designation in Baltimore’s Port Covington thanks to powerful political connections and a mapping error from an overly complex program design.
Luxury apartments in Portland Oregon’s vibrant downtown district and in residents in New York City's Brooklyn Heights, where the median income is $94,000 a year, and even 15 NFL stadiums are all benefiting from the new federal tax privilege.
The Opportunity Zone tax breaks will likely increase visible signs of investment in targeted areas. However, much of this will represent a shift in investment, not new investments.
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Workers not in Opportunity Zones are being disadvantaged to make businesses in zones favored by bureaucrats, politicians, and special interests artificially more profitable.
Unlike the narrow, targeted tax preferences exhibited by this newest version of place-based subsidies, the evidence is clear that broad-based tax cuts benefit all Americans through a strong economy. Institutional and local reforms are needed to enable residents of impoverished communities to seize the opportunities created by a strong national economy.
Joel Griffith is a research fellow in the Roe Institute at The Heritage Foundation.
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