How a Tech Mogul Pushed Through a Tax Break

The U.S. tax code is larded with provisions that the wealthy use to reduce their taxes. Some get a lot of attention, while some are inserted into tax bills very quietly—like Opportunity Zones, or OZs.

Six pages tucked into the sprawling 2017 Tax Cuts and Jobs Act led to the creation of 8,764 of these tax havens across the U.S., ostensibly to lure private capital to poor neighborhoods. Anyone can invest capital gains from a previous investment in a building or business in a census tract designated as an OZ by a state’s governor, defer and reduce taxes on that initial gain, and then pay zero capital-gains tax on any profits from that OZ investment, provided that they stick with it for 10 years. Other than holding on to an appreciated asset until you bequeath it to your children, there aren’t many other ways to avoid capital-gains taxes altogether. This one has a huge advantage: “You don’t have to die,” says Brad Cohen, a Los Angeles tax lawyer.

Unlike earlier versions of the concept implemented by Margaret Thatcher in the U.K. and proposed by the late Republican politician Jack Kemp, OZs are designed to be free of complicated rules. There are no limits on how many people can take advantage of an OZ or how much tax revenue the U.S. Treasury may forgo. A few kinds of businesses are ruled out—no tanning salons, golf courses or liquor stores. 

But there is no requirement that a project actually benefit residents of the zone. Aaron Seybert, who follows OZs for the Kresge Foundation, argues, “More money is not always better. OZ doesn’t require measurement, accountability or tracking of any impact beyond dollars in; it rewards appreciation regardless of social impact.”

The idea for Opportunity Zones didn’t come from economists or policy experts. It was the brainchild of the tech investor Sean Parker, of Napster and Facebook fame, who told me earlier this year that his objective was “to democratize access to capital.” Mr. Parker says that he hasn’t personally taken advantage of the tax break.

To design and lobby OZs into law, Mr. Parker financed a politically agile think tank, the Economic Innovation Group (EIG). In 2013, Mr. Parker hired Democrat Steve Glickman, a staffer on President Obama’s National Security Council, and Republican John Lettieri, an executive of a trade group now known as the Global Business Alliance, which represents U.S. units of foreign multinationals.

To build legitimacy and a bipartisan reputation, EIG recruited Kevin Hassett, later the chair of President Trump’s Council of Economic Advisers, and Jared Bernstein, who now sits on President Biden’s CEA. They laid the foundations for OZs in a 20-page white paper released in 2015.

Mr. Parker, meanwhile, diversified his campaign contributions. In 2013, campaign finance records show, all but $10,000 of his $571,000 in contributions went to Democrats. In 2014, he nearly doubled the total and divided the money between Democrats and Republicans.

Mr. Parker and EIG enlisted an impressive roster of bipartisan sponsors for the initial OZ bill. Says Mr. Parker: “Just when you think you’ve convinced the key decision maker, you find out that, like a 1980s videogame, you beat the boss only to find out that there’s a big boss, only to beat the big boss, to find out that there’s an even bigger boss and you’re kind of just like, ‘I thought I won this thing. Why is there another level?’”

The key recruit, by all accounts, was Republican Sen. Tim Scott of South Carolina, an influential member of the Senate Finance Committee. The Trump administration initially showed little interest in Opportunity Zones. But after Sen. Scott publicly and bluntly criticized the president’s statement that there were “very fine people on both sides” of the violent demonstrations in Charlottesville, Va., in August 2017, he was invited to the Oval Office. According to Sen. Scott, Mr. Trump said, “Tell me what I can do to be helpful to the people I’ve offended,” and he replied: “Help me get OZs into the tax bill.”

The president agreed. There were no hearings on OZs and no discussion at markups or House-Senate conferences. It was all done so quietly that no national newspaper reported on the provision until a month after the law was signed in December 2017. Once it was discovered by wealth advisers, tax lawyers, accountants and real-estate investors, though, a gold rush followed. In 2019 alone, reporters for Bisnow, a digital media firm, counted more than 50 industry conferences dedicated to spreading the word about OZs and raising money.

So what has happened in OZs over the past three-and-half years? Hard data is scarce—reporting requirements were stripped from the bill before it became law. But so far it seems that much of the money invested in OZs is going to real-estate projects that would have been built anyway. Rev. Donte Hickman, a Baltimore pastor and economic-development advocate, was an early fan of OZs who praised them at a White House press conference in 2018. Since then he has soured on them. Offering wealthy investors a tax incentive simply isn’t a substitute for public investment, he says.

A report by a Joint Tax Committee economist found that the $19 billion in OZ investments reported on 2019 tax returns went to just 16% of designated OZs, with 1% of the zones receiving half of the total. OZ money is funding the revival of downtown Erie, Pa., and affordable housing in south Los Angeles, but it is also financing a Ritz Carlton hotel and condo complex in downtown Portland, Ore., and a Virgin hotel in New Orleans. Self-storage facilities, which create hardly any jobs, are sprouting with OZ money. So is luxury student housing in university towns, which are eligible only because college kids show up as poor in census tallies.

EIG says that Opportunity Zones are still in a “proof of concept” phase, while acknowledging the program needs tweaking. But Mr. Parker is not troubled by the evident shortcomings of the law he championed. “Nothing that’s done on this scale can ever be perfect,” he told me. “We couldn’t anticipate where all of the holes would be. Now, with hindsight, we can see where some of those holes are…and where they should be tightened up.” President Biden promised “reform” of OZs during the 2020 campaign, but he hasn’t proposed any specific measures to make good on that pledge.

Originally Published: WSJ.com

Mr. Wessel is director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. This essay is adapted from his new book, “Only the Rich Can Play: How Washington Works in the New Gilded Age,” which will be published on Oct. 5 by PublicAffairs.