The U.S. Qualified Opportunity Zone Program Is Vulnerable to Corrupt Manipulation by Politically-Connected Investors. Here’s How To Fix It.

The U.S. federal government’s Qualified Opportunity Zones Program, a program established as part of the 2017 Tax Cuts and Jobs Act, is supposed to drive investment to certain low-income neighborhoods (so-called “qualified opportunity zones,” or QOZs) by allowing investors to defer (or, in the case of sufficiently long-term investments, to avoid) capital gains taxes on their investments in these areas. The process of designating QOZs works as follows: First, the U.S. Department of the Treasury provides each state with a list of eligible “economically distressed” neighborhoods. This list is based on census data, but, importantly, it includes not only neighborhoods located in poor census tracts, but also neighborhoods that are adjacent to poor neighborhoods, or that overlap (even slightly) with areas designated as “empowerment zones” under a Clinton-era redevelopment initiative. Next, each state governor has the authority to nominate up to 25% of these eligible neighborhoods for designation as QOZs. The governors’ lists are then submitted to the Treasury Secretary, who has the final authority to certify these neighborhoods as QOZs. As of July 2020, 8,700 neighborhoods had been designated as QOZs.

Many have questioned the wisdom and efficacy of the QOZ program on a variety of grounds, with some characterizing the program as little more than a new form of tax avoidance for the wealthy that fails to address structural poverty. Even if one puts those concerns to the side, there are serious concerns that the existing QOZ program—and in particular, the process for selecting QOZs described above—has been corrupted by wealthy interests, who are able to exploit their political connections to get certain areas designated as QOZs, even when professional staff deem such designations inconsistent with the established program criteria. Consider just a few high-profile examples:

  • Treasury Secretary Steve Mnuchin personally instructed the Treasury Department to grant a QOZ designation to a Nevada neighborhood that had previously been found ineligible, after associates of Mnuchin’s friend Michael Milken (the former “junk bond king”) lobbied the Treasury Department to add the neighborhood to the list. Though the Department claimed that the reversal was due to ironing out inconsistencies in Treasury rules, internally both IRS and Treasury staffers were critical, with one IRS employee saying the decision risked “opening the door for accusations that the determination process was influenced by political considerations or bias.”
  • In Maryland, a private development company owned by Kevin Plank (the founder of Under Armour), successfully lobbied Maryland Governor Larry Hogan to designate a Baltimore neighborhood in which the company owned significant property as a QOZ, despite the Governor’s staff advising that the neighborhood, which was not on the Treasury Department’s list of poor census tracts, was too wealthy to qualify. Plank’s developers and lobbyists have contributed to Hogan’s campaigns in recent years. As with the Nevada neighborhood discussed above, this Baltimore neighborhood was added to the Treasury list later on, despite not meeting the ordinary criteria. The apparent legal justification was a tiny, and possibly illusory, overlap with an empowerment zone, but many suspect behind-the-scenes lobbying.
  • In Michigan, Dan Gilbert (the founder of Quicken Loans, which made a $750,000 contribution to Trump’s inaugural fund) successfully lobbied local, state, and federal officials to designate a wealthy area of downtown Detroit as a QOZ.
  • In Florida, then-Governor Rick Scott selected as a QOZ a West Palm Beach neighborhood that included a superyacht marina—against the advice of other state officials—after lobbying from several major campaign donors.
  • In West Virginia, Governor Jim Justice designated as a QOZ a neighborhood that included his own resort, prompting accusations of conflict of interest.

It is admittedly difficult, in these or other cases, to point to clear evidence of corruption, especially if one employs a narrow legal definition. Yet the examples are troubling. As Senator Ron Wyden, the ranking member on the Senate Finance Committee, put it last November, the manipulation of the QOZ program by politically-connected interests is “an egregious example of corruption which demands serious congressional investigation.” To counter this problem, Senator Wyden introduced a bill, titled the Opportunity Zone Reporting and Reform Act, which would narrow the available types of projects allowed by the program, exclude investments in luxury assets from eligibility, and remove hundreds of non-low-income neighborhoods from the program.

This bill, if enacted, would be a step in the right direction. But reformers should also push for three additional reforms to address corruption risks in the QOZ designation process.

  • First, the Treasury Department’s list of eligible neighborhoods should be narrowed to include only those neighborhoods in poor census tracts, according to the most recent census data. The fact that census data might not perfectly capture the location of current economically distressed neighborhoods is outweighed by the interest in reducing the risk of arbitrary or manipulated designations. Moreover, the Treasury Secretary should not be able to unilaterally change the national list of eligible zones. If there were questions about census tracts that hypothetically should have qualified for the program and don’t, the Secretary should have public deliberations to correct possible omissions. The Treasury or IRS should also prioritize the creation and regular updating of a government-run online map of all tracts eligible for QOZ status for each state, including linked census data that shows why each tract meets the program requirements.
  • Second, state governors should not have the sole authority to select QOZs in their state. The governor can lead the process, but the governor should be required to have a series of public deliberations where various stakeholders can present their neighborhood preferences. Next, governors should have to publicly submit their final choices to a state committee of experts which would have the authority to block selections that don’t meet the established definition of an “ economically distressed community.”
  • Third, all lobbying and other communications from private parties to government officials regarding QOZ determinations should be required to be public, with would-be investors who violate this provision subject not only to significant fines, but also to a bar on participating in the QOZ program for a period of one year.

Again, there are bigger questions about whether the QOZ program is a good idea as a matter of policy, and Congress should therefore consider whether the program should be retained in any form. But assuming the program is here to stay, at least for now, Congress can and should amend the law to make the program less vulnerable to corrupt manipulation by politically connected cronies.

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