New book looks at Portland’s “opportunity zones”

Thousands of places across the country are formally designated “opportunity zones.” The idea is to revitalize areas that need it by offering a tax break to wealthy investors. David Wessel, a senior fellow at the Brookings Institute, has written a new book about opportunity zones called “Only The Rich Can Play.” Portland is featured in one chapter.

The following transcript was created by a computer and edited by a volunteer.

Dave Miller: From the Gert Boyle Studio at OPB, this is Think Out Loud. I’m Dave Miller. About four years ago, federal lawmakers quietly tucked six pages into a nearly 200-page tax cut bill. They were based on an idea pitched by, among others, a billionaire tech investor and Napster creator Sean Parker. His idea, in short, was to give tax breaks to people who were investing in parts of the country that were suffering economically. Those areas have been designated as opportunity zones. But maybe not surprisingly, the idea hasn’t always worked as intended. For example, the Ritz Carlton Hotel that’s going up in downtown Portland was partly funded with these tax breaks. In fact, all of the center of Portland has been designated as an opportunity zone. David Wessel traveled around the country including to Oregon, to write about opportunity zones. He joins us now to talk about his new book, Only the Rich Can Play. David Wessel, welcome.

David Wessel: Good to be with you.

Miller: What is the problem that people like Sean Parker, the billionaire tech investor, that he was trying to solve?

Wessel: We’ve had over time a lot of conversation in the United States about the widening gap between rich and poor income inequality. What Parker and the little think tank he funded, were focused on was geographic inequality. That is, the fact that some communities are doing great and others are left behind and the gap between them seems to be growing. So his basic idea was, can we find some way to use the tax code to give rich people who have money an incentive to put it into communities that need money? And that’s the basic idea.

Miller: So, as I mentioned, the title of your book is Only The Rich Can Play. Why is it that essentially only rich people can take advantage of this benefit?

Wessel: The way this particular benefit works, you have to have a capital gain. That is you have to have invested in something: stock, bonds, property, art, something. You have to have had a profit. And then you can take that profit, defer and reduce the capital gains tax you owe on that, and put that money into an opportunity zone, property of some kind. And any profits you make on that investment are tax-free if you hold it for 10 years.

Miller: So not only are you not paying capital gains taxes, are you getting a cut in that? But you’re also getting a cut in the future profits that you’re getting from investing in the money that you got from your initial, say, stock sale?

Wessel: Right. So the most important part of this is, you have to have capital gains to play. Only rich people have substantial capital gains. Most people don’t. In fact, if you make less than $80,000 a year, there is no capital gains tax. And although maybe one in five taxpayers has a capital gain, most of them have only, you know, single digit thousands of dollars. So this is designed for rich people. Because after all, rich people have money. But the way it works is, let’s say you bought Apple stock, you have $100 profit on your Apple stock. So ordinarily, you know, $250 or $280 to the government and capital gains tax when you sell it. Instead, if you put it in an opportunity zone fund. First, you don’t have to pay that $280. Initially, you get to delay that for a few years and it’s always better to pay taxes later than sooner. Secondly, you get a discount on that $280. But importantly, that – I might have confused myself $28 – importantly, the money you put in an opportunity zone project like the Ritz Carlton in downtown Portland, if you hold it for 10 years and it appreciates, and presumably you wouldn’t invest in it unless you thought was gonna appreciate, you don’t have to pay any capital gains taxes whatsoever.

Miller: So let’s turn to Oregon. It’s one of the places that you came to in your tour around the country, to look at how opportunity zones are actually working. Why come to Oregon?

Wessel: Well, I was looking . . . unfortunately there’s not a lot of data about opportunity zones. Partly that’s because the provision that would have required reporting got stripped out of the bill when it went through Congress, and partly because we’re in early days. So Portland and Oregon had a couple of things going for it. There was no sign that I could find that there had been corruption in Oregon. So it wasn’t like some other places . . .

Miller: You mean, like backroom dealings about how the zones were going to be decided, for example?

Wessel: Right. So there’s a famous example in Nevada, where there was lobbying to get a zone created. Secondly, the governor of Oregon’s office clearly was very thoughtful about how they picked the zones. In some states, New York and California among them, the Governor’s offices weren’t very interested in this provision, and they kind of made silly choices. But thanks to some Freedom Information Act stuff that The Oregonian got, we could see the conversations going on among the governors’ aides about how to make this work. So also, there was, to be clear, this interesting story that Bloomberg had done, called Tax Breaklandia, that had pointed out to me that there was the Ritz Carlton. So I don’t want to pretend that I didn’t know that was there when I came. But basically, I think it’s a great example, and one of the things that it tells us is that the problem with opportunity zones, of which there are 8,764 across the country, is that the money tends to go to those zones that are already attractive. So what the Governor of Oregon’s office – said was, let’s have some zones which are already getting money and we’ll give them a little more, and let’s have some zones that are really not very well off. And what happened is all the money [goes] to the first. So there’s all sorts of money in downtown Portland going to opportunity zones, whereas in Rockwood, which is, outside of Portland, a more immigrant minority community. It is also an opportunity zone, but they’re not getting very much money.

Miller: But I’m still wondering how it could be that all of downtown Portland could even qualify as an opportunity zone, if the whole point of this is, let’s incentivize investment in places that somehow we can agree need investment places where there isn’t money going in now, then how can a place where, not just a Ritz Carlton, but other developments that were already in the works. How could that even qualify to begin with?

Wessel: That’s a good question. The law sets some criteria for what zones would be eligible, and more than half the zones in America were eligible. And then the governors had the authority, the responsibility to choose up to 25% of the eligible zones. But in downtown Portland,

for instance, in part because of good public policy, in my view, in the past, those parts of downtown Portland do have some people living there in subsidized or affordable housing. So even though they’re not very many residents of those census tracts in downtown Portland, those residents who are there tend to be poor, and that made them eligible. And the same thing happened all over the country. That’s a flaw in the design of the law, and in the way that the Trump treasury administered it.

Miller: You note another one, which I don’t know if you can call it a flaw. It really seems like a clear loophole that’s been exploited in Portland and many other places, is that developers can take advantage of this tax break, even if a new building is basically done, if it’s not yet occupied. Can you explain how this works?

Wessel: Right. So what this tells us is there’s nothing wrong with a rich person like Sean Parker having an idea, and trying to talk people into making that idea law, but it’s not a good idea to have Sean Parker and the think tank he funded actually design the law and get it slipped into a bill without the kind of scrutiny that something like this deserves. So there’s a building at 250 Southwest Taylor that was built, financed, and leased to Northwest Natural, the local gas utility, but that was all done before opportunity zones even showed up. But because it didn’t have a certificate of occupancy, the developers of that building were able to sell it to a New York-based opportunity zone fund called Prospect Ridge, and they were able to make it look like this was new investment and there are some requirements that make new investments [eligible]  to take advantage of the opportunity zone tax break. But this is clearly a loophole. It’s something that should not have been allowed, condemned by some other real estate developers in Portland, including Greg Goodman and it’s happened in other cities. It’s just one example of how screwed up this law is, and how hard it is to use the tax code to get rich people to do things for social good, when they employ lots of people whose job it is – lawyers and accountants and so forth – to make sure that they get their tax break without regard to whether it really helps the community.

Miller: One way to think about opportunity zones is in the tax revenue that the federal government is foregoing by granting these breaks. How much money are we talking about nationwide?

Wessel: The short answer is that we don’t know. The way the law was written, the tenure costs, which is the one that matters to Congress, was very low, and that’s because you have to make some tax payments in 2026, and that offsets any lost revenue in the first 10 years. But the bulk of the losses to the Treasury will come beyond the 10-year window and that really depends on how much money goes into opportunity zones and how much profits the people make there.

My guess –  and I want to underscore it’s a guess – is we’re talking about $75 or $80 billion have gone into opportunity zones so far. So that tells you that, say, a quarter of that is lost revenue to the government. That tells you the order of magnitude. But that’s really a guess. We don’t know.

Miller: If the idea here at base is in the end, not to help a Ritz Carlton go in, or some new shiny headquarters for a utility company, but instead to help parts of the country that are struggling, what do you see as a better way to use that same amount of money that would be an expenditure of tax money as opposed to foregone tax revenue?

Wessel: I think I can answer that in two different ways. The first is, one could obviously say, if we have to go through the Rube Goldberg plumbing of the tax system to get some social good, and we know there are going to be a lot of leaks in that plumbing, maybe the better thing to do is just raise taxes on rich people, then the government can use that money, perhaps matching what private sector people do in the communities and the projects that are what opportunity zones were designed for. If we decide that that’s not the way we want to go – and there’s always political opposition to raising taxes and there are always people who would rather cut taxes and it’s really spending, but they like to describe it as a tax cut – a provision like this could be much more narrowly drawn. We could rule out say housing, that’s for people who make more than the median income, and we could have much more scrutiny by the bureaucrats at the Treasury. Sean Parker and the Economic Innovation Group thought that the problem with previous efforts in this realm failed because there was too much oversight, too much bureaucracy and too many limits. So they designed something that has no limits and very little oversight. I personally think they went too far, but there is a balance there. You make things too complicated [then] you may never get an outrageous investment, but you may not get any money either.

Miller: Is anybody now talking about adding the kind of newer strings or increased scrutiny regulation that you think should have been there all along?

Wessel:  “Talking”? Yes.

Miller: [Laughter] I mean a serious movement in Congress?

Wessel: No. President Biden campaigned on a promise to reform opportunity zones, but the Biden Treasury has done nothing. And there’s nothing in the bills that I can see pending in Congress that would do anything. Of course Senator Ron Wyden, chairman of the Senate Finance Committee, has proposed a bill that would severely limit what you can use opportunity zone money for. And he’s an important person in this thing. But at the moment there’s no action pending.

Miller: David Wessel, thanks very much for joining us.

Wessel: You’re welcome.

Miller: David Wessel is a fellow at the Brookings Institution and he is the author of the new book, Only The Rich Can Play, a book in which Portland figures pretty prominently in one of the big chapters.

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