Originally published in The Intercept on January 30, 2018.
Even as the debate over the Republican tax overhaul continues, there is general consensus that corporations and the wealthy will now enjoy huge tax cuts while the rest of America gets precious little. But, based on an article published Monday, New York Times economics reporter Jim Tankersley would have you believe that a provision buried on Page 130 of the tax bill is part of a “plan to help distressed America.”
The plan is to pump more money into “opportunity zones.”
The problem, though, is that he glosses over years of research that show that so-called opportunity zones do next to nothing to revive distressed areas. Opportunity zones are a decades-old bipartisan idea that involves showering businesses with tax breaks, subsidies, and other incentives to lure them into struggling areas, with the hope that new injections of capital will lead to community renewal and revitalization.
The opportunity zones were “never debated on the floor of the House or Senate” and were “never promoted by Republican leaders or the White House,” but according to Tankersley, their inclusion in the tax bill “is an attempt to grapple with … the fact that, in huge swaths of the country, the economic recovery has yet to arrive.” He declared the provision “the first new substantial federal attempt” to aid communities with high poverty and sluggish job growth in more than a decade. “If the zones succeed,” he wrote, “they could help revitalize neighborhoods and towns that are starved for investment.”
There’s a lot packed into that “if.”
In his attempt to shed light on the “little-noticed section in the $1.5 trillion tax cut,” Tankersley spoke to politicians, community development professionals, and venture capitalists like Sean Parker, who expressed enthusiasm for idea. There are a few glaring omissions, though. The article includes no comments from scholars who have actually studied opportunity zones, and it links to none of the many research studies done on their effectiveness. Spoiler: Research shows these schemes rarely ever help cities, and often hurt them. (The article does link to illuminating resources such as a biography of Republican Sen. Tim Scott.)
In fact, “the bottom-line effects of these kinds of tax incentives are often too small to change the locational preferences of investors,” explained Rachel Weber, an urban planning professor at the University of Illinois at Chicago. “Moreover, they often create complex financial and administrative structures that consume a large portion of the tax benefit as transaction costs paid to industry professionals, leaving less for the bricks and mortar.”
Dan Immergluck, a professor in the Urban Studies Institute at Georgia State University, offered a similar assessment. “There is not much evidence that marginal tax breaks to incentivize capital investment or hiring by private firms works very well,” he said. Immergluck distinguished opportunity zones from what he calls “deeper incentives” like the Low-Income Housing Tax Credit. “The LIHTC clearly creates housing that would not exist otherwise,” he said. “But it is not a marginal incentive to move private capital around. It creates fundamentally a new form of capital. This opportunity zone program will not do that.”
Buried toward the end of Tankersley’s article is a brief acknowledgment that past research shows previous revitalization efforts haven’t worked out so well, but this history was apparently not sufficient enough to blunt the article’s decidedly sunny outlook. “Proponents say the new Opportunity Zones are designed to be more effective than earlier programs,” Tankersley wrote, offering no real explanation as to why. He also asserted that the New Markets Tax Credit — a federal tax break to spur revitalization in distressed communities launched in 2000 — has been “more successful” than previous opportunity zone efforts. But he offered no research to support that claim, either. The few studies that do exist on the New Markets Tax Credit paint a mixed picture, at best. A Government Accountability Office study published in 2014, for example, found that the the program has “become more complex and less transparent” over time, and as a result, investors potentially take home a much higher rate of return than is warranted. Also, due to data limitations, the GAO concluded that “it is not possible to determine, at this time, the NMTC project failure rate with certainty.”
Last summer, Timothy Weaver, an urban policy and politics professor at the Rockefeller College of Public Affairs & Policy at the University at Albany, published an article on opportunity zones, tracing their effectiveness in both the United States and the United Kingdom — where the concept originated in the early 1980s.
“Enterprise zones do very little to revive urban areas,” he concluded. “At best, they divert investment from one part of the city from another, resulting in no net gain for the city as a whole. At worst, they result in tax-giveaways to firms that would have been operating anyway, thereby generating a net loss to city revenues. … The enterprise zone is a zombie policy that staggers on despite its moribund performance. It’s time to perform the last rites and bury it once and for all.”
Reached for comment on the New York Times article, Weaver told The Intercept that he “was struck by its slap-dash approach to critical engagement.” Put differently, that investors may stand to reap major windfalls does not mean that the communities themselves will be better off.
“There is no question that cities — poor areas in particular — need capital investment,” he added. “However, this is a terribly inefficient way of going about it.”