By Olugbenga Ajilore
December 3, 2018 at 5:00 am ET
The U.S. Senate has proposed a bill to help natural disaster areas by easing any potential tax burdens in the recovery process, designating these areas as Opportunity Zones. The OZ incentive program encourages, through favorable tax treatment, investors to roll over capital gains into funds that will be invested in distressed communities.
However, the OZ program — established as part of the Tax Cuts and Jobs Act of 2017 to spur economic development in low-income neighborhoods — does not contain the necessary community guardrails to protect existing residents, and adding natural disaster areas as OZs will further the problems inherent in the program. As climate change only expands the size and scope of these natural disasters, we must be especially careful in how we address the aftermath of these extreme events.
Encouraging private capital to flow to those areas, investors can receive a tax deferral and other tax benefits if they roll over capital gains into an Opportunity Zone fund. To partake in this project, investors must set up a partnership or corporation (called a Qualified Opportunity Fund) that functions as a vehicle for investments in Opportunity Zones.
If investors hold the investment in an Opportunity Zone for at least five years, they qualify for a 10 percent tax exclusion on their original deferred gain, and if they hold it for seven years, a 15 percent exclusion. Plus, any capital gains on the Opportunity Zone investment are fully tax exempt if the investment is held at least 10 years. Tax on the original amount invested is deferred until December 2026 — or earlier, if the Opportunity Zone investment is sold.
A key concern with the OZ incentive program is that it does not require engagement of the low-income community, despite the program’s mission of improving outcomes for the individuals who live in low-income neighborhoods. Sens. Cory Booker (D-N.J.) and Tim Scott (R-S.C.) along with Congressmen Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.) promoted the program by arguing that there were barriers preventing private capital from flowing into distressed communities. However, the Opportunity Zone program does not remove any so-called barriers to ensure that individuals in the selected tracts will either get better job opportunities, get better quality housing, or, in the event the neighborhood improves, be able to afford remaining in that neighborhood.
This is reminiscent of disaster capitalism, where the private market takes advantage of a natural disaster to impose privatization of government services. This was evident in the aftermath of Hurricane Katrina, where Republicans in Congress attempted to push through free-market reforms in New Orleans. Among the reforms were school vouchers, removal of environmental regulations on refineries, and the expansion of tax credits for recovery and reconstruction. With respect to tax credits, the Gulf Opportunity Zone Act of 2005 expanded the Low-Income Housing Tax Credit and provided incentives to developers to building affordable housing.
While the initial results showed an increase in subsidized housing, the act had a limited time frame, and some people felt there was too much subsidized housing being built. The other problem with the GO-Zone Act was that the credits were not allocated by need but on a first-come, first-serve basis, which meant those with the greatest need weren’t always served.
Also, disaster areas as designated by the president tend to encompass much larger geographies than the census tracts outlined in the OZ program. Increasing the number of eligible geographies to include disaster areas is going to cost the federal government much more revenue while conferring benefits to more than low-income communities.
By expanding the number of OZ-designated areas, investors will take advantage of the economic opportunities created from the devastation to build properties targeted to high-income individuals rather than helping the existing residents rebuild. Congress should not designate natural disaster areas as OZs until the proper guardrails are implemented so that the people devastated by floods and fires do not get re-traumatized.
Olugbenga Ajilore is the senior economist at the Center for American Progress.
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