A prediction: When Congress finally passes the Build Back Better bill, Hill leaders will quietly slip in at least one obscure, last-minute tax break to benefit an elite group of wealthy taxpayers. Few lawmakers will know it is there. Journalists won’t discover it until after the measure has passed.
It won’t be the first time. The 2017 Tax Cuts and Job Act included a package of exceedingly generous tax breaks for investors in Opportunity Zones (OZs). In his deeply-researched new book, Only The Rich Can Play, David Wessel tells the fascinating—and cautionary—tale of how that provision came to be and what it has wrought.
Wessel, who covered tax policy for The Wall Street Journal and now directs the Hutchins Center on Fiscal and Monetary Policy at The Brookings Institution, shows how Congress came to turn an obscure idea into law. Then he reveals how those tax breaks really work.
Sean Parker’s brainchild
OZs were the brainchild of Sean Parker, the founder of Napster and first president of Facebook
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Parker believed these new investments would turbocharge economic development and create jobs. The result so far: a new way for the mega-rich to shelter investment profits from capital gains taxes that provides little help for struggling communities. The cost/benefit analysis of this use of taxpayer dollars is not pretty.
In Wessel’s telling, Parker knew nothing at first about how to get a law passed by Congress. But he had plenty of money to spread around. And he hooked up with two smart and well-connected Washington operators, a former Obama Administration staffer and a former GOP congressional aide. They used some of Parker’s money to create a think tank called the Economic Innovation Group (EIG).
Political connections
Then, in classic Washington fashion, EIG commissioned a white paper to promote OZs. To write it, the outfit retained Kevin Hassett, who would become a top economic adviser in Donald Trump’s White House, and Jared Bernstein, a former chief economist for Vice President Joe Biden and now a top economic adviser to President Biden.
But even white papers authored by well-connected economists don’t get bills passed. That takes at least one influential lawmaker to make the bill a top priority. It can’t just be a passing interest. It has to top their legislative wish list.
Parker got South Carolina Republican senator Tim Scott.
Then, two events sealed the deal.
First, Donald Trump, who, as Wessel notes, understood real estate, got elected president. Then, the violent White nationalist rally in Charlottesville VA happened. Scott, one of the few Black Republicans on the national stage, got a meeting with Trump to talk about the event and the president’s response to it. He walked out with Trump’s support for OZs. Months later, Senate GOP leaders slipped the idea into the giant 2017 tax cut as a favor to Scott.
How OZs have worked
But that was only the beginning. Wessel wanted to know what happened with those tax breaks. The law requires almost no disclosure of OZ investments. So he painstakingly dug through economic development efforts in Portland OR and Baltimore MD to see how the zones are working in the real world. What he found is both disheartening and entirely unsurprisingly.
Trump’s Treasury Department allowed governors to pick zones under extremely lax rules. And many were tempted to choose areas already poised to take off. Indeed, Wessel reports that even part of the Las Vegas strip sits in a designated OZ.
That flexibility alone may have undermined the program’s ability to benefit people most in need. A few of Wessel’s conclusions about the program nationally:
· With 8,764 designated zones to choose from and fewer tax-subsidized dollars than sponsors hoped for, investors put their money in low-risk, high-return projects in already- gentrifying communities. Areas of deep poverty received little.
· Among the most popular projects: High-end student housing and storage units.
· Many OZ projects would have been funded anyway.
· By accelerating gentrification, some projects perversely displaced the poorest residents of distressed communities, the very people they were intended to help.
· The details matter. A lot.
Idealistic…arrogant
Some experts in tax and economic development, including my Urban Institute colleague Brett Theodos, warned the OZ promoters of these pitfalls. But the proponents didn’t listen.
There still were plenty of winners. Commercial landowners in designated zones reaped big windfalls. As my TPC colleague Steve Rosenthal predicted in August, 2018, so did syndicators of OZ investment pools and those wealthy investors who reduced or even eliminated capital gains taxes.
Wessel believes Parker and his Washington enablers were well-intentioned and deserve credit for their boldness and ingenuity. He also says they were “idealistic, arrogant, stubborn, and naïve.”
When you watch the final chapter of Build Back Better unfold, keep OZs in mind. Congress will almost surely slip in another obscure tax break that will benefit a small number of very fortunate people.