Senior Tax Legal Analyst
In finalizing its regulations on the 2017 tax law’s “opportunity zones,” the Treasury Department took some questionable business giveaways that were included in its proposed regulations and actually expanded them.
The Joint Committee on Taxation (JCT) has nearly doubled its estimate of the zones’ cost in lost federal revenue, and the new regulations could raise those costs even more. Given that, in its final regulations, Treasury failed to significantly curb opportunities for abuse or to ensure that opportunity zones fulfill their ostensible purpose of benefiting low-income areas, policymakers should evaluate how the program is working, who really benefits, and how to prevent widespread tax avoidance — and then adjust the law as needed.
The opportunity zone provision lets investors defer taxes that they would otherwise owe on capital gains (profits they realize when selling an asset, such as stock) by “rolling” these gains into funds (known as OZ funds) that invest in low-income areas. If investors keep their interests in these OZ funds for a certain number of years, they can qualify for additional tax breaks — including a permanent tax exemption on all gains they realize on their opportunity zone investments through 2047.
The 2017 tax law’s opportunity zone provisions were already vague, and Treasury’s proposed regulations in many cases would have made it easier for investors to claim tax benefits for only minimal investments. Moreover, many designated zones are ripe for high-end investments (like luxury apartments) that likely wouldn’t generate significant benefits for low-income residents, as we’ve written. We and others therefore urged Treasury to use its regulatory authority to help prevent the zones from becoming tax shelters. Instead, the final regulations will let investors claim tax breaks for even broader activities than the proposed ones.
For example, the final regulations:
We’ve seen similar dynamics play out in other areas of the 2017 tax law, with lobbyists using the regulatory process to secure significant new tax breaks that mainly benefit multinational corporations and very affluent owners of certain kinds of businesses. And when Treasury issues overly lenient regulations, investors can claim tax breaks for a larger set of activities, which can cost taxpayers even more.
In its most recent projections, JCT estimates that opportunity zones will cost about $3.5 billion a year from 2019 through 2022. That’s nearly double what it estimated in 2018 for this tax break. (See chart.) The final regulations’ investor-friendly rule changes create the potential for opportunity zones’ costs to go even higher than current estimates — with no guarantee that low-income areas, or their residents, will benefit.