Do ‘opportunity’ tax breaks miss target?
After 2017 overhaul, millions in incentives meant to spur poor areas may go to thriving hubs
The federal tax overhaul of 2017 aimed to create jobs and spur economic activity in lowincome neighborhoods by allowing states to designate areas in need of revitalization as Opportunity Zones where investment would be rewarded by federal tax breaks.
But in Texas, Gov. Greg Abbott’s administration has named some of the most economically robust and rapidly appreciating areas in the state as Opportunity Zones, including bustling downtown sections in Houston, Dallas and San Antonio. That means millions of dollars in taxpayer money may end up in thriving business districts to which plenty of money is already flowing, while bypassing poor communities that desperately need it.
The Abbott administration’s list of Opportunity Zones, for example, overlooked the poorest section of Greenspoint in northwest Houston, where 1 in 2 people live in poverty and the median household income, $23,000 a year, is less than half the city’ $49,000.
But Downtown Houston, where the median household income is $99,000, is poised to benefit from the tax breaks, even though cranes already dot the skyline, Fortune 500 companies such as United Airlines, Bank of America and JPMorgan Chase have major offices there and affluent professionals are buying into highend condominium towers.
“This area probably doesn’t need any help,” said Brett Theodos, who researches economic and social policy at the Urban Institute, a Washington think tank. “We’re probably subsidizing investment that would have happened any-
“This area (downtown) probably doesn’t need any help.”
Brett Theodos, a researcher for Washington think tank Urban Institute
way.”
Opportunity Zones were included in sweeping tax changes that Congress approved just over a year ago. The incentives allow investors and companies to defer and substantially lower capital gains taxes when they sell stocks, businesses, real estate or other assets by reinvesting those profits in Opportunity Zones. Taking advantage?
For example, a corporation that divested a business and earned $100 million on the sale would normally pay 21 percent, or $21 million, on the gain. By reinvesting that money in an Opportunity Zone and holding that investment for seven years, the company would cut the tax by 15 percent, to $18 million.
In addition, the company would not have to pay tax on the appreciation of the investment after holding it for 10 years. So, if it eventually earned $200 million on the holdings in the Opportunity Zone, it would still pay just $18 million — instead of $42 million — and save $24 million.
Congress’ Joint Committee on Taxation estimated in 2018 that the incentives would cost taxpayers as much as $1.9 billion. But the ultimate cost could be much higher since the program doesn’t limit the amount of investment qualifying for the tax breaks, and some of nation’s biggest corporations are positioned to take advantage of the incentives.
Amazon.com, for example, plans to locate its New York headquarters in a Queens neighborhood designated as an Opportunity Zone.
The law gives governors the power to designate Opportunity Zones in areas where at least 20 percent of residents live in poverty or the median income is 80 percent of that of the city or state, based on the 2015 Census estimates. Each state can select up to a quarter of the eligible areas for the program — a designation that remains in effect through 2029.
In Texas, Abbott designated 628 Opportunity Zones, 23 percent of the eligible areas. Many of the zones are centered around existing investment hubs, such as the Medical Center in Houston, the convention center in Dallas and the Riverwalk in San Antonio. Neither the governor’s office nor the state Economic Development Department responded requests for comment.
‘Bigger need’
In Harris County, the state designated 105 zones. Theodos analyzed every Census tract in the country, and his data show that areas that are gentrifying rapidly — as measured by increases in income, housing costs and populations of white and college-educated people — represented a disproportionate number of the Opportunity Zones in Harris County. In fact, Downtown and Midtown have gentrified so rapidly that had the government used 2017 Census estimates instead of 2015, the areas would not have qualified for the program.
In that two-year span, for example, Midtown’s poverty rate fell by more than half to 18 percent from 38 percent and the median household income climbed 13 percent to $91,000. High-end apartment complexes have sprung up throughout the neighborhood, and more are on their way, including The Midtown, which will be the area’s first high-rise.
Over the same two years, the poverty rate in west Greenspoint rose 8 percentage points to 49 percent, and the median household income declined $1,000. Damon McCullum, who recently opened a U-Haul franchise in a shuttered Kroger beside a closed Luby’s in the neighborhood, wrinkled his brow when he heard that Midtown would benefit from the federal tax breaks, while west Greenspoint would not.
“Having that extra incentive for businesses to come to the area would definitely have an impact because that would bring more jobs, more opportunities and more education,” he said. “Making people self-sufficient makes the biggest impact in a community — starting with this one here.”
McCullum, 41, lives in Katy but decided to invest in the neighborhood after joining the Green House International Church, a congregation known for its community outreach, about two years ago. His UHaul employs five workers, and he plans to start a second business, a reupholstery shop employing between 14 and 20 veterans.
“I saw a bigger need here versus Katy,” he said.
College try
A recent analysis by the Brookings Institution, a Washington think tank, concluded that Opportunity Zones were set up in a way that allowed states to choose areas that did not necessarily need the help. The research found, for example, that dozens of selected neighborhoods weren’t poor, but rather had large populations of college or graduate students, which inflated poverty rates.
One neighborhood adjacent to Texas A&M had an annual median income, $16,000 — an astonishingly low figure until one considers that 99.9 percent of the people living there are enrolled in university. That neighborhood was selected as an Opportunity Zone.
“It seems obvious,” wrote the study’s authors, Hilary Gelfond and Adam Looney, “but if one is trying to help people in distressed areas, one needs to target places that are truly distressed.”
Meanwhile, as vacant properties in Greenspoint remain on the market, investor interest in Downtown has increased exponentially, according to the commercial real estate brokerage firm Berkadia.
Ryan Epstein, senior managing director of the company’s Houston office, said land for sale near downtown that was languishing on the market began receiving a flood of offers after the areas became Opportunity Zones.
He added that prices in those areas have risen, but said it was too early to give estimates since many of the land deals have not closed.
“In Houston, Downtown is already a vibrant area that people want to invest in,” he said. “So this additional incentive is icing on the cake.”