A Trump administration tax break designed to spur investment by the affluent in low-income neighborhoods may be rewarding investors for infusing their money into already gentrifying areas where no incentive is needed, including two highly-prized locations in Nevada.
Opportunity Zones, established by Trump’s 2017 Tax Cuts and Jobs Act, allow investors to reinvest capital gains and avoid taxes by putting their money into low-income areas in need of investment, as designated by the nation’s governors.
The policy is designed to spur capital investment in low-income areas in much the way mortgage interest tax deductions spurred home buying. With final rules yet to be issued by the Treasury Department, it’s too soon to know if it will work.
“Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed,” Sean Parker told Forbes last year.
Parker, whose Economic Innovation Group authored a 2015 paper on the policy and lobbied for its passage, is the creator of Napster and was portrayed by Justin Timberlake in the movie The Social Network.
“Congress had previously tried similar approaches with Empowerment Zones and Renewal Communities. But its latest effort is remarkable for its lack of a governmental oversight role and for its generosity to investors,” wrote Steve Rosenthal of Urban-Brookings Tax Policy Center in a Forbes article last year.
OZ investments held for at least 10 years have no capital gains tax liability and defer capital gains on existing assets placed in Opportunity Funds, the vehicles used to manage capital investments. Opportunity Funds can be set up as corporations or partnerships. Ninety percent of the fund’s assets must be in Opportunity Zones.
Former Nevada Gov. Brian Sandoval named 61 census tracts as low-income OZs in 2018.
One of Sandoval’s selections, which includes the Tahoe Reno Industrial Center in Storey County, was ineligible because residents’ median income was too high, and qualified only after Sandoval and then-U.S. Senator Dean Heller applied pressure to the Treasury Department, according to the Washington Post.
“The successful campaign to win this lucrative designation illustrates how political pressure can redirect billions of dollars in federal benefits, which are supposed to be distributed in a non-arbitrary manner,” the Post wrote.
Low-income communities are defined as census tracts that have a poverty rate of at least 20 percent and median family income up to 80 percent of the area median.
The projected 2023 average median household income in all Opportunity Zones in America is $46,158, according to the Opportunity Zone Index, a tool for developers to gauge the investment-worthiness of projects. The average median projected income for Clark County’s OZs is $38,839, and $26,850 in Washoe County’s zones.
But Opportunity Zone selections were based on census data from between 2011 and 2015, when Nevada was just emerging from a crippling recession. Some of the tracts designated last year by then-Gov. Sandoval have rebounded since then — meaning investors will receive tax benefits for pouring money into neighborhoods that likely would have prospered regardless.
“It’s a flawed instrument,” Robert Lang of Brookings Mountain West said of Opportunity Zones. “But one with, dare I say, opportunity.”
Not all investments are suitable for reaping the tax benefits available for OZs. Sin businesses are not included. The Treasury Department defines “sin business” as:
- Golf course
- Country club
- Massage parlor
- Hot tub facility
- Suntan facility
- Racetrack or other facility used for gambling
- Any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
Football stadiums are bereft of sin, in the Treasury’s eyes. Half of the National Football League’s 30 stadiums are in OZs, including the Las Vegas Raiders Stadium. Several stadiums are poised to take advantage of the tax incentives.
But not the publicly-financed Raiders Stadium. Taxpayers, who are funding $750 million of the stadium, will get no tax breaks offered by Opportunity Zones.
“The land and the structure are municipally owned, so it’s tax-exempt. There would be no benefit,” says Guy Hobbs, managing director of Hobbs, Ong & Associates, and a member of the Southern Nevada Tourism Infrastructure Committee. “I felt we needed to do an economic zone around the stadium to capture some of the investment. That’s wasn’t done.”
However, Hobbs says the Raiders’ creditors on the project, Bank of America and the NFL, could seek the tax breaks of being in an OZ.
The census tract that includes the Raiders stadium and a nearby tract on the east side of Interstate 15 between Sunset and Warm Springs are likely to produce the greatest return among Las Vegas OZs, according to the Opportunity Zone Index.
According to the Index, the census tract that includes the stadium has only 2,100 residents, fewer than most of the designated OZs. Projected household income for 2023 is just under $70,000.
“I developed a model that ranked all the census tracts in the state but Clark County designated that area,” said Derek Armstrong, Deputy Director of the Governor’s Office of Economic Development. A spokesman for Clark County says the local government designated all the OZs within the county.
Steve Wynn, who sold his interest in his hotel empire last year for $2.1 billion, met with the Treasury Department last summer about minimizing his tax bill via OZ investment, according to the Wall Street Journal, which reports Wynn did not take advantage of the opportunity.
The best investment option in Northern Nevada, according to the Index, includes the Tahoe-Reno Industrial Park (TRIC), home to Tesla, Google and most recently, Blockchain, which stands to take advantage of the tax breaks. Median household income projected for 2023 is $70,264.
“Nevada has it rigged up for the Tahoe-Reno Industrial Center,” says Lang, who maintains the Las Vegas tax base makes redevelopment efforts possible for the rest of the state. “The federal government came around with this imprecise instrument and with wiggle room they were able to designate Storey County, this same area that’s gotten two-thirds of the state’s tax abatement.”
Welfare for the rich?
A study by the Urban Institute reveals a quarter of the tracts chosen nationwide as OZs already enjoy significant investment.
Montana, Washington, D.C., Alaska and Georgia selected low-income areas with the lowest levels of existing investment, according to the Urban Institute, while Hawaii, Vermont, Nebraska and West Virginia selected tracts that had the most existing development.
Unlike redevelopment incentives and tax credit programs, OZs include no requirements that area residents fill jobs created by new investment.
Timothy Weaver, a professor of Urban Policy and Politics at the University at Albany, State University of New York, wrote there’s evidence to indicate OZs do little to benefit residents.
“Sadly, these policies almost inevitably result in tax giveaways for investment that would have occurred anyway, as we’re beginning to see with opportunity zones. Under such circumstances, displacement from gentrification is the likely result,” Weaver wrote last year for CityLab.
“In an optimistic scenario, the tax benefits might encourage purchasing and rehabilitating residential property or expanding local businesses,” Adam Looney of the Brookings’ Institution wrote in a 2018 paper. “But the value of the tax subsidy is ultimately dependent on rising property values, rising rents, and higher business profitability. That means a state’s Opportunity Zones could also serve as a subsidy for displacing local residents in favor of higher-income professionals and the businesses that cater to them — a subsidy for gentrification.”
Because OZs are restricted to just one in four of any state’s low-income areas, they would seem to provide an opportunity to study on the benefits (or lack thereof) resulting from tax incentives.
The City of Las Vegas recommended 13 areas as OZs:
- Medical District near Rancho and Charleston
- Cashman Area including former baseball field and Neon Museum
- Symphony Park (home of the Smith Center and Cleveland Clinic Lou Ruvo Center for Brain Health
- Arts District/Stratosphere
- Fremont East (a thriving area for tourists and locals east of Las Vegas Boulevard)
- Industrial Corridor
- Eastern/Bonanza to Fremont
- Maryland Parkway Corridor
- Decatur/Fletcher Jones dealership/Meadows Mall
- Bonanza Corridor/Moulin Rouge
- West Charleston/Jones to Rainbow
- North Rainbow
- Downtown Core
Only the last two areas, North Rainbow and the Downtown Core, were rejected by Sandoval.
Clark County officials recommended areas along Boulder Highway; the Las Vegas Stadium Overlay, which is the area encompassing the Raiders Stadium; the Las Vegas Speedway; and Maryland Parkway.
Reno limited its selections to the Business Improvement District, which includes downtown; the Reno Stead Airport; and the Dickerson Road Main Street America project.
“Much of Downtown Reno is included within OZs, as well as large portions of the industrial park there, and I think OZs will spur desperately needed real estate investment in Reno, as well as catalyze entirely new communities with all of the new industrial activity that’s coming to that part of Nevada,” says Steve Glickman of Develop Advisors.
What’s Nevada doing to monitor the results of its OZ recommendations?
“We put together a task force of individuals in Southern Nevada to help coordinate OZ best practices,” said Armstrong, who says he’s heard grumbling from “folks who weren’t happy with the designations because we could only nominate 25 percent.”
Armstrong says gauging the success of OZs will be a challenge.
“Obviously, we’ll know if some of these projects kick off, but we wouldn’t know if those are Opportunity Zone projects or otherwise.
One in six people in America live in low-income areas, according to the federal census. Scientific evidence indicates growing up in poverty has profound and lasting effects on children.
In response to a question about how the Trump administration could best help vulnerable students, Education Secretary Betsy Devos suggested last week that Opportunity Zones can help students achieve.
“At best, these programs give firms incentives to do things like redistribute economic activity,” Scott Eastman of the Tax Foundation told U.S. News. “What research has found is that place-based incentive programs are somewhat ineffective at creating new employment or new opportunities. At worst, these things can be counterproductive.”
A story this week in Bloomberg says Treasury Secretary Steven Mnuchin predicted investment of $100 billion a year in OZs, but a database that tracks OZ funds found only 88 hoping to raise $26 billion.