Whether the Trump administration’s opportunity zones program is working is anybody’s guess because there has been little to no oversight in collecting data to analyze results, according to a new report by the U.S. Government Accountability Office.
Federally designated opportunity zones are designed to encourage development in economically distressed areas by providing tax breaks for investors. When passed into law as part of the 2017 Tax Cuts and Jobs Act, the program did not designate an agency with the responsibility to collect data and report on its performance, according to the GAO, a bipartisan investigative watchdog unit serving Congress.
The criticism reinforces the need for congressional action to correct the inefficiencies, according to Sen. Ron Wyden, an Oregon Democrat who is a ranking member of the Senate Finance Committee.
“The GAO report again reiterates the complete lack of oversight of the opportunity zone program,” Wyden said in a statement. “Without better data on business starts, jobs or incomes there’s nothing to show that low-income communities have benefited from the program at all. There’s an urgent need to finally pass legislation and impose some real guardrails.”
About 10% of Americans live in the nearly 9,000 opportunity zones, according to Census Bureau data. Taxpayers who invest in qualified opportunity funds — that in turn invest in the zones — have the potential to receive significant tax-related benefits on their qualified investments.
The benefits are huge to investors but consequently pose a greater risk to the collection of U.S. taxes by the Treasury Department, according to the GAO.
For example, if a taxpayer invested $1 million of capital gains in a qualified opportunity fund in 2019, and that investment averaged a 7% annual growth rate, the fair market value would be approximately $2 million after 10 years. The tax on that initial $1 million investment as well as the $1 million additional gain would be eliminated if the investment were held for the full 10 years.
The Treasury Department estimates lost tax revenue from opportunity zone investments to be $3.6 billion for 2020. And for the GAO, the problem is that there is no way of knowing whether the program is producing any benefit from that lost revenue.
“Given the potential revenue losses associated with [opportunity zones] and the relatively few limits on its use, oversight and reporting of performance — particularly outcomes — are critical,” the GAO said in its report.
The Internal Revenue Service administers and collects data explicitly for tax-compliance purposes. Some of this data, such as investment amounts, can be used to evaluate outcomes, the GAO said.
However, IRS officials told the GAO that they were unable to report the total amount of deferred capital gains invested in funds at this time because some data is not being transcribed from the IRS forms that taxpayers use to claim opportunity zone benefits, according to the GAO.
The GAO recommended that Congress consider providing the Treasury Department with the authority to collect data and report on opportunity zone performance. Also, as part of that, Congress should also consider identifying questions about the program’s effects that it wants the department to address in order to help guide data collection and reporting of performance, including outcomes.
Republican South Carolina Sen. Tim Scott, a leading proponent of the program, has been a consistent advocate for instating reporting requirements.
“I hope we can move forward swiftly on this legislation either in the lame duck or in 2021,” Scott said in a statement.
Getting any legislation passed this year could be difficult, Steve Glickman, founder and CEO of Washington, D.C., opportunity zone advisory firm Develop Advisors, told CoStar News in an email.
“Just about all stakeholders agree that [opportunity zones] need more data reporting and transparency as the program originally intended,” Glickman said. “In an election year, passing any legislation is challenging, but I suspect we will see reporting and transparency clarity built into the law in the coming year.”
With a change in administrations in January, however, broader changes of the opportunity zone program could be on the horizon.
Biden called for reform in the run-up to the election on his campaign website.
“The program as a whole is ‘not living up to its economic and community development goals,’” according to the website. “While there have been positive examples, in too many instances investors favor high-return projects like luxury apartments over affordable housing and local entrepreneurs.”
As part of his reform package, Biden has called for requiring recipients of the opportunity zone tax break to provide detailed reporting and public disclosure on their investments and the impact on residents, including poverty status, housing affordability, and job creation.