Return to OZ
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It’s time to return to Oz — and by that, I don’t mean anywhere with yellow brick roads, but Opportunity Zones, the federal tax boondoggle I’ve written about here a few times before.
The short version of the problem with Opportunity Zones, which are often called OZs in policy circles, is that they’re meant to aid low-income neighborhoods, but more often wind up helping wealthy investors and corporations in already developed areas finance projects they were going to undertake anyway.
Today, I want to highlight a few things that have happened with Opportunity Zones since the last time they made an appearance in this newsletter: One good, one bad, and one truly, impressively ugly.
The Good: One of the issues Opportunity Zones cause is that they’re based on reductions in capital gains taxes — which are levied on gains made from selling investments — and most states take their cue on capital gains taxes from the federal government. So OZs have a double whammy, lowering revenue for both the federal and state government, even though states didn’t actually do anything to change their own tax codes.
Fortunately, states are getting wise to this problem. Four — California, Mississippi, North Carolina, and Massachusetts — have already decoupled their own capital gains tax from anything related to Opportunity Zones, and New York has a bill to do the same, sponsored by state Sen. Mike Gianaris and Assemblyman Jeffrey Dinowitz. It would be a big deal for New York — the world capital of finance and a huge real estate and development market — to break up with OZs in this way.
As several organizations led by Reinvent Albany, including my own, noted in this memo, “Both New York City and State have budget shortfalls of several billion over the next few years, and budget cuts are likely to have a major impact on school districts and social services across the state. Opportunity Zone subsidies cannot be justified in the best of times, so there is no reason why New York should continue forgoing precious tax dollars during a historic budget crisis.”
New York should do this thing, and then other states should follow suit.
The Bad: Opportunity Zones aren’t effective, and neither are tax breaks for data centers. Connecticut is set to combine the two into a truly awful policy stew by making the investment threshold a corporation setting up a data center needs to hit in order to receive tax breaks lower if that data center is in an Opportunity Zone.
Because if there’s one thing areas historically starved of economic development really need, it’s massive tech complexes that use loads of resources and create very few jobs.
This bill, which has passed both chambers of the legislature and is expected to be signed by the governor, will lock Connecticut towns and counties into decades-long arrangements that will have very little payoff. All it will do is provide money to already massive companies — like Facebook, Amazon, and Wall Street banks — to build what they need to build in order for their businesses to literally exist.
To sum it up, Connecticut lawmakers, not content with the destructiveness of OZs themselves, are piling new junk on top to make them even worse. As State Sen. Matt Lesser, who opposed the bill, said, “this model of economic development doesn’t work. In fact, it’s led to the economic inequality and stagnation we’ve experienced for far too long.”
The Ugly: The locations of Opportunity Zones are based on Census Tracts: If a tract hit certain economic indicators in terms of income, poverty, and whatnot, and was nominated by a governor or state legislature and approved by the Treasury Department, it received OZ designation. But as this excellent Bloomberg piece explains, corporate leaders and investors lobbied the Trump Administration, in its waning days, to shift Census boundaries so that projects that were once outside OZs are suddenly in them.
The most egregious example includes changing a boundary so that a development spearheaded by the NHL’s Pittsburgh Penguins, as well as the Penguins’ arena, is now in an Opportunity Zone. The team confirmed that “the project would have moved forward even without the boundary change, which happened after plans for the site were far along.”
Guess I need to update my count of 52 professional sports stadiums that are in OZs.
OZs, because of the way in which they’re chosen, have been gamed by lobbyists and lawmakers across the country. But literally moving Census Tracts in order to put a sports stadium-related development that was long in the making into a zone where its backers will receive tax incentives is a special new achievement in cynical cronyism.
The Biden Administration has said that it is going to put new rules in place to bring more transparency to the OZ program. But every bit of news that comes out further confirms my feeling that the program is irredeemable and needs to be repealed outright, as a few members of Congress have suggested. At this point, it’s not just providing a windfall to corporations and wealthy investors who don’t need it, but is also corrupting other policy choices at both the federal and state level.
As I’ve said before, beware any economic development policy bearing the word “zone.” It’s usually an efficient mechanism for sending taxpayer money to the rich and famous.
SHAMELESS SELF-PROMOTION: Two things to note this week: First, I wrote a piece with the excellent Justin Stofferahn for the Minnesota Reformer about the history of tech innovation in that state and how a bill to rein in Google and Apple’s power over app distribution could help it flourish again. Read it here.
Second, I testified before the House Finance Committee in Rhode Island in favor of that state’s bill to join the interstate compact against corporate giveaways. You can read the testimony here.
UPDATE: Speaking of app distribution bills, the Arizona House passed its version! Now it moves on to the state Senate. You can catch up on the background on this issue here and read a letter of support from a bunch of progressive organizations that I helped organize here.
Also, this state-based effort received a pretty nice endorsement on Thursday:
COOL EVENTS: These should be really good!
— Monopolization and America’s Nuclear Triad: What Could Go Wrong? Today at 2:00 p.m. EST. RSVP here.
— Access to Markets: Freeing Entrepreneurs & Independent Businesses From Dominant Gatekeepers Feat. Congressman Joe Neguse March 12 at 12:00 p.m. RSVP here.
ONE MORE THING: Proponents of corporate tax breaks often argue that every dollar spent on giveaways provides some massive amount of benefits to the local population. Over the years, I’ve heard some whoppers about just how big those benefits are. But this one is truly absurd: Boosters of Utah’s film tax credit program claim that every dollar spent on subsidizing Hollywood equals $14 dollars in increased GDP for the state.
My friend John Buhl had the proper response:
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— Pat Garofalo