Safeguards Needed to Ensure Program Helps Intended Residents
In Donald Trump’s 2020 State of the Union Address, he referenced “Opportunity Zones”. The name references a multibillion-dollar federal tax break program that is supposed to help low income communities. The Department of Housing and Urban Development has designated more than 8,000 census tracts across the U.S. as “distressed.” Investors looking to take advantage of the capital gains tax incentives have been fanning out in economically distressed areas all over the country. In Wisconsin, we have 120 designated Opportunity Zones and 71% are urban and 29% are rural. We have even more communities that could be eligible, but have not received this designation.
There are three types of tax incentives available to investors in a Qualified Opportunity Zone Fund — deferral, reduction, and exclusion. You can defer paying federal income tax on capital gains until that investment is sold — or no later than the end of 2026. You can get a reduction between 10-15% if the investment is held between 5-7 years. You can get an exclusion, or in other words, pay no taxes on earnings, if the investment is held for 10 years. A good deal if you can get it, right?
What Trump failed to mention in his address is that many of his cronies, family members and advisers are some of the biggest beneficiaries of Opportunity Zones, not really the poor. Everyone from former Gov. Chris Christie of New Jersey, Anthony Scaramucci, the former White House aide who spent time in a Wisconsin jail, to Trump’s son-in-law Jared Kushner, all stand to make millions of these zones. Legislators are taking note and finding some disturbing trends.
In neighboring Chicago, Baltimore and New York, investors have been lobbying legislators and getting the rules changed to get these benefits in areas that are not deemed distressed. Many companies are not playing fair or gentrifying low income areas, with the effect of “having their cake and eating it to”. They are able to spur development in a way that moves out the very residents the opportunity zones were intended to help.
As a result, I join the growing number of legislators paying closer attention to these deals. In Wisconsin, there is a new bill that would allow an investor to exclude an additional 10% of state capital gains tax if the investment in a Wisconsin Opportunity Zone fund is held for at least five years, or an additional 15% if held for at least seven years. The bi-partisan measure is a tool that can be used to spur much needed growth in economically distressed areas. However, in a recent article in the Journal Sentinel, there were questions raised about a high-rise market rate apartment project in downtown Milwaukee. Although it will include some low-income units, who is really benefiting? We just have to work hard to make sure that the Opportunity Zones are just opportunities for some.