Biden’s team sees promise in a tax break championed by Trump
President Donald Trump spent months on the campaign trail taking credit for “opportunity zones,” a policy meant to encourage investment in distressed communities across the U.S.
Joe Biden’s team sees potential in the idea, too.
One of his top economic advisers co-wrote the white paper that led to their creation. His running mate, Kamala Harris, has pointed to the zones as a way to spur entrepreneurship. And their campaign website listed ways of reforming, rather than repealing, the policy.
“There are a lot of people in his universe who care about this,” said Steve Glickman, a former Obama administration official who pushed for the incentives and now runs a consulting firm for investors in the zones. “They think it’s a good idea.”
It all means that opportunity zones — a controversial piece of the Republicans’ 2017 tax overhaul — are likely to endure even as Biden vows to roll back many of his predecessor’s policies. Still, there’s growing agreement on both sides of the political aisle that the rules need to be fine-tuned to prevent abuse. That may mean reining in some types of investments in zones or reporting more data.
The policy traces back to a 2015 report by Jared Bernstein, who advised Biden when he was vice president, and Kevin Hassett, the former chairman of the Council of Economic Advisers for Trump. Their idea was to get people to redeploy unrealized capital gains into needy areas through a series of investment tax breaks.
A bipartisan group of lawmakers introduced bills in 2016 to enact the idea, but they never reached a floor vote. One sponsor, Republican Senator Tim Scott of South Carolina, successfully got a modified version into the tax overhaul Trump signed into law. Governors then nominated Census tracts, creating roughly 8,800 zones where investors could reap the breaks.
The benefits are generous. First, investors get to defer paying capital gains taxes for years if they sell appreciated investments and roll the proceeds into a fund targeting zones. But the real sweetener comes later: A business or real estate project held by a fund at least a decade isn’t subject to capital gains when sold.
Funds targeting zones have gathered hundreds of millions of dollars or more, often for real estate investments. Yet the benefit for poor residents is hard to track without public data on how perks are used. While supporters are confident the incentives are catalyzing worthwhile investments, examples keep emerging of investors looking to juice profits on luxury developments. Several news outlets have even shown politically connected investors influenced the selection of zones to benefit projects already in motion.
Just this week, a government watchdog report highlighted how the Trump administration hasn’t gathered the type of data that would enable a thorough evaluation and called on Congress to pass legislation so the Treasury does so.
Biden has put transparency at the core of his plan for overhauling opportunity zones. His “Build Back Better” racial equity-focused campaign plan called for directing the Treasury to review the policy to ensure projects create social benefits. It also would require tax-break users to “provide detailed reporting and public disclosure” of investments.
A spokesperson for Biden’s transition team referred to the campaign plan and declined to answer questions about what changes his Treasury Department might make or what efforts in Congress he would support.
Lawmakers from both parties have already put forth a variety of bills.
Scott has said his top priority is adding reporting requirements. A bill he introduced in December would direct the Treasury to post data annually on investment funds claiming the breaks, and to track job growth, poverty reduction and other economic indicators at five-year intervals. Oregon Senator Ron Wyden, the top Democrat on the Senate Finance Committee, proposed a reporting bill with lots of other restrictions attached.
“The good news is people on both sides of the aisle, including both presidential candidates, have expressed support for reinstating reporting requirements,” Emily Lavery, a legislative assistant for Scott, said in a statement.
If Republicans keep control of the Senate, changes to the tax rules are less likely to come from Congress, said Brett Theodos, a senior researcher at the Urban Institute. Instead, the program’s future could depend on who becomes the next Treasury secretary, he said.
“A more Wall Street-oriented Democrat is going to be more interested in seeing this program continue as it is,” potentially adding reporting requirements, said Theodos. But a Treasury secretary critical of subsidies for big investors would have “a lot of tools at their disposal” to reform the program, he said.
Critics have taken issue with the selection of certain zones, such as a trendy arts district in Los Angeles and swaths of Brooklyn. And some have suggested replacing those that don’t meet traditional ideas of struggling neighborhoods with zones that do.
“That’s something that it seems both sides would be interested in,” said Shafron Hawkins, a former Scott staffer who was involved in the legislation and has since founded a trade group for opportunity zone funds.
One big potential change could affect the certification process for opportunity zone funds. Right now, funds self-certify their tax-advantaged status, but the Treasury could, for instance, force investors to make detailed disclosures before getting the benefits, said Michael Novogradac, managing partner of Novogradac & Co. His firm leads an influential working group that plans to advise the new administration on ways to change the certification process.
“We hope to have that together in the next 30 to 45 days, in advance of President-elect Biden taking office,” he said.