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Trump’s Opportunity Zones Don’t Work. This Might.

Trump’s Opportunity Zones Don’t Work. This Might.

Sunday, 6 September, 2020 - 06:30

A spate of looting in Chicago in mid-August should remind us that the problem of concentrated urban poverty still exists in the US. While looting is often an outgrowth of protests — not only in big cities like Chicago, but also more recently in places such as Kenosha, Wisconsin — it also can represent a response to a sense of economic privation and inequality. Chicago itself is a notoriously segregated and unequal city, so it’s unsurprising that economic frustrations would boil over there in addition to anger against police brutality. Nor is Chicago unique — as urbanist Jason Segedy has noted, declining neighborhoods are still very common in the US. It’s a problem that needs to be addressed.


President Donald Trump did implement one policy that was supposed to help improve the situation of poor urban neighborhoods — the Opportunity Zones program — but it looks to have been a dud. Fortunately, better ideas exist.


Before getting into those, it’s worth looking at how Opportunity Zones have fallen short and why. Created as part of Trump’s Tax Cuts and Jobs Act in late 2017, the Opportunity Zones program gives tax breaks for investment in economically distressed neighborhoods. The theory is that if companies invest in these places, local residents will get jobs as a result. But the program was beset by problems from the outset — in particular, the kind of investment the program encouraged was unlikely to be the most economically beneficial kind.


In economics theory, financial investment and the creation of real business activity are one and the same; in the real world, they are often very different things. The Opportunity Zones program allowed investors to claim a tax break by buying up real estate or existing businesses in the targeted areas, even if they didn’t create any new businesses or employ any workers in those areas. There was no real mechanism to make sure that property purchases or private equity deals helped local residents.


Trump’s Council of Economic Advisers deems the program a success. As evidence, it cites the amount of financial investment the zones have experienced. But this is hardly a surprise. If you pay investors to put their money in a particular class of assets, they generally do so. That can certainly result in capital gains for people who already own property and businesses in these areas, and in fact the report does show price appreciation in the targeted neighborhoods. But how much of this money — some $3.5 billion a year in lost federal tax revenue — trickles down to the lower-income residents who need it most?


Some new research suggests that the answer is none at all. In a recent paper, economists Rachel Atkins, Pablo Hernandez-Lagos, Cristian Jara-Figueroa, and Robert Seamans compare the designated opportunity zones to similar areas that weren’t targeted for federal tax breaks. They find that although salaries in the program’s target areas were very slightly higher than otherwise, job postings were lower. So the program isn’t creating jobs. But at least it’s raising wages, right? Probably not.


The smaller amount of job postings could mean that the lowest-income workers are getting fewer jobs in these areas, which would decrease average wage levels. Also, a rise in property values could cause higher-income workers to move in and gentrify the area. This would be consistent with the results of previous tax incentive programs.


Atkins et al. also find that only a small percentage of the designated opportunity zones received any investment at all. These tended to be places that were already on the upswing — in other words, gentrifying areas. This strengthens the overall picture of Trump’s program as a tax giveaway for gentrification that fattened some investors’ pockets but did little to help low-income Americans, and totally ignored the neediest neighborhoods.


Democratic presidential candidate Joe Biden has proposed reforming the Opportunity Zones program, adding oversight and forcing investors to work with local community organizations. But there’s another, simpler fix that would turn the program from a tax giveaway into a real employment program: pay investors to hire local residents.


This is exactly what the Empowerment Zone program did. Enacted under President Bill Clinton, this program gave companies tax credits based on the wages they paid to people living in the designated zones. It also gave locations block grants, to be spent on pro-worker initiatives such as infrastructure and worker training. A 2013 analysis by economists Matias Busso, Jesse Gregory, and Patrick Kline found that the Empowerment Zone program raised employment and wages without raising local living costs -- exactly the kind of results a place-based investment program should want.


The principle here is simple: Investors do what you pay them to do. If you give investors tax breaks to snap up local real estate, they’ll raise housing prices and speed gentrification. If you give them tax breaks to hire poor and working-class residents, they’ll do that instead. If Biden wins the presidency, he should focus on shifting the Opportunity Zones program from the former to the latter.


Bloomberg


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