A new book that offers a critical view of opportunity zones just hit bookshelves. What are some of the biggest shortcomings of the tax policy, and how can it be improved?

David Wessel is a senior fellow in Economic Studies at Brookings and director of the Hutchins Center on Fiscal and Monetary Policy, the mission of which is to improve the quality of fiscal and monetary policies and public understanding of them. He joined Brookings in December 2013 after 30 years on the staff of The Wall Street Journal.

Click the play button above to listen to my conversation with David.

Episode Highlights

• The role of previous place-based tax policies in shaping Opportunity Zone legislation.
• A behind-the-scenes look at how the Opportunity Zone legislation was crafted in Washington, D.C.
• Tracing the origins of the Opportunity Zone program go back to Sean Parker and EIG.
• How a broad, bipartisan coalition in support of Opportunity Zones formed, and the critical role that Senator Tim Scott played.
• Elements of the Opportunity Zone legislation that were stripped out from early drafts, and how these modifications resulted in shortcomings.
• Examples of Opportunity Zone projects that may fall short of the intent of the program, and David’s suggestions for improving the current Opportunity Zone legislation.
• How a rushed process for designating census tracts unfolded in Oregon and other states.
• The potential for the program to be opened up to allow for non-capital gains proceeds to be deployed in Opportunity Zones.
• The merits of place-based economic policies versus people-based economic policies as geographic mobility declines.
• Examples of Opportunity Zone projects being used for the intended purpose in Baltimore, Los Angeles, and elsewhere.
• Suggestions for improving the Opportunity Zone program from both David and Jimmy.

Featured on This Episode

• David Wessel on LinkedIn
• DavidWessel.net
• Only the Rich Can Play on: Amazon | Apple Books | Barnes & Noble | Google Play
• Sean Parker
• Economic Innovation Group
• Summary of the Byrd Rule
• New Markets Tax Credit Program
• Map of Opportunity Zones
• Distressed Communities Index
• SoLa Impact Fund
• Episode 88: Social Impact in L.A.’s Opportunity Zones, with Martin Muoto and Reid Thomas
• UC Berkeley / Joint Committee on Taxation Opportunity Zone Research

Industry Spotlight: Brookings Institution

The Brookings Institution is a nonprofit public policy organization based in Washington, DC. Its mission is to conduct in-depth research that leads to new ideas for solving problems facing society at the local, national and global level.

Learn More About Brookings:

• Visit Brookings.edu

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. A new book about opportunity zones offers a critical view of many of the program’s shortcomings, and also tells the fascinating story of how the tax policy was born. Joining me today on the podcast is author of “Only the Rich Can Play: How Washington Works in the New Gilded Age.”

David Wessel is senior fellow and director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. He’s also a former Wall Street Journal reporter and columnist and the author of two New York Times bestsellers. His new book about opportunity zones was released on October 5th, and he joins us today from Washington, DC. David Wessel, thanks for joining me. Welcome to the podcast.

David: Well, it’s good to be with you, Jimmy.

Jimmy: Yeah, good to have you here David. I’ve read most of your book at this point. It’s a fascinating story about how the sausage was made. I wanna get into that with you in a few minutes here. But first, a very pointed question to start us off. Are opportunity zones a case of good intentions gone bad?

David: I’m afraid so. I think the proponents of opportunity zones were so committed to the idea that previous place-based tax policies had too many rules and too much of a role for bureaucrats at the Treasury that they went to an extreme in the other direction. So while opportunity zones can and are being used for their intended purpose, to improve the fortunes of people who live in left-behind communities, there’s nothing to require that. And I think, as a result, money has flowed to an awful lot of projects that don’t meet this intended purpose, projects that would have been done otherwise or projects that don’t serve the communities in which they’re built.

Jimmy: Yeah, I think that’s a fair take. I’m a big advocate of the free market. I appreciate what you’re saying that maybe this has gone a little bit too far in the other direction from some of the previous place-based programs where it’s much less restricted. I view that as a double-edged sword, right? I mean, one, it does unlock a lot more private capital and allows a lot more creativity and deal-making and transactions to happen. There’s no cap on this program. But as you point out, maybe the intent of the program gets lost a little bit when you open it up too much. I can respect that view.

So your book focuses on opportunity zones, but I think part of the larger idea of your book, David, correct me if I’m wrong, is really to just describe how things in Washington get done, the good, the bad, the ugly. The first part of your book, in particular, delves into the history of opportunity zones, how it was born, how the sausage was made, essentially. I’m curious though, when, and why did you decide to write this book and why the focus on opportunity zones?

David: That’s a really good question. So as you noted earlier, I left “The Wall Street Journal” about eight years ago and came to the Brookings Institution to run this little subset of our economic studies Program, the Hutchins Center. And my job at the Hutchins Center is very much like being an orchestra conductor. I help a lot of people do things, but none of them are really my own projects. So I was really in the mood to find something I could do that would be my own. And one of my colleagues, Adam Looney, who’s a public finance economist, had been really interested in opportunity zones.

Adam is one of these people who he’s been at the Treasury in the Obama years, is just he gets…he can get more upset about something in the tax code than almost anybody I ever met. And he called my attention to opportunity zones. And I thought, “Well, this is interesting.” I’ve always been interested in how we can use public policy to improve the lives of people in poor communities. And then somehow he let it slip that Sean Parker had something to do with this. So suddenly, I thought, “Well, writing about taxes for a popular audience is really hard. But if there’s a backstory that involves somebody as glamorous as Sean Parker, man, this really has potential.”

Jimmy: Yeah, the backstory that you paint is very sensational and very glitzy, right?

David: Right. And you may remember Jimmy, we met at an Opportunity Zone Expo at the Mandalay Bay Hotel and Resort in Las Vegas. I went to that because I thought, if I do a book, I’m gonna regret not going to some OZ expo in Las Vegas. It was at that expo where I met lots of fascinating people, you included, on all sides of this, that I thought, “Well, there’s a really interesting story to tell here.” And as people who go to these expos love to talk about why they’re there, so I went with my notebook and I just met such fascinating people. I thought, “Okay, this is my ticket to a good narrative. And even better, it’ll give me an excuse to travel around the country.” Well, that didn’t work out so well because of COVID. But I did meet a lot of really interesting people.

Jimmy: Yeah, the guy in the cowboy hat, in particular, I think everybody who was at that expo knows exactly who I’m talking about. They may not have met him or know his name, but everybody remembers that guy in the big cowboy hat with the sign on his hat. It was quite the colorful audience there, and it really did typify or exemplify the gold rush atmosphere that opportunity zones cultivated, particularly early on in 2018 and 2019 before COVID, right?

David: Right.

Jimmy: Your book does an excellent job of telling the story of how opportunity zones came to be. It traces its roots back to Jack Kemp’s enterprise zones, to Bill Clinton’s empowerment zones and enterprise communities, to New Markets Tax Credits, to finally how today’s opportunity zones, which were born from Sean Parker, as you mentioned, and also two individuals who you refer to in your book as the EIG boys, Steve Glickman and John Lettieri. Can you fill in some of those details? I wanna hear from you firsthand, how did OZs come to be exactly? Maybe you can summarize the first part of your book for us.

David: Sure. So this is really an impressive success story. There are lots of Silicon Valley billionaires and multimillionaires who are convinced if only they could do something in Washington, it would get done and it would work well, if only we didn’t have all of the political jockeying and bureaucrats who refused to change their ways. I mean, Sean Parker is the ultimate hacker. So Sean Parker, for a long time, was trying to figure out, how do we solve the problem that a lot of rich people have a lot of money, and there are a lot of communities that need money. And we’ve got to find some way to get private capital into these communities because there’s never gonna be enough government money to do it.

And so Sean shot this idea around, talked to a lot of people. He’s just a charming guy, and he’s a real network builder. And eventually, he hired Steve Glickman, who had been in the Obama White House, a Democrat, and John Lettieri, a Republican, who had been, at the time, working for a trade organization of U.S units of foreign multinationals, to create the Economic Innovation Group. It was an unusual think tank in that it was one man’s idea and one man’s funding. And although Steve and John sometimes don’t like the story to be told this way, I think they did a very successful job at laying the groundwork for explaining a problem, geographic inequality, that they had a solution for opportunity zones.

Now, I should say, and John Lettieri’s very sensitive to this, that EIG has grown beyond that, and they’re doing all sorts of things about immigrant visas and retirement plans for workers who don’t have them and stuff. But the origin story, it seems to me, is pretty clear, and I heard it from Sean Parker and his sidekick Michael Polansky directly, they wanted to figure out how to get something enacted into law, and EIG was the route that they got there.

Jimmy: Okay, so EIG was the vehicle through which opportunity zones was born, essentially. But can you provide some detail on how it went from a conceptual idea within Sean Parker’s mind, and at EIG, to then getting packaged into some legislation and ultimately passed as part of the 2017 Tax Cuts and Jobs Act?

David: So EIG did something unusual in Washington, but common in Silicon Valley, their first couple of years were in stealth. And over time, when they built like a database, they built graphics, they talked to politicians, they laid the case that we have this big problem of geographic inequality. They made a very catchy website that a lot of news media picked up on which community is doing poorly and why. And so they kept calling attention to this problem that some economists really had been blind to. Economists were so focused on income inequality, the difference between rich and poor, that they didn’t spend a lot of time thinking about this geographic inequality.

Then because Lettieri and Glickman are so good at the Washington game, they recruited first a couple of economists, one Republican, Kevin Hassett, later chair of Trump’s Council of Economic Advisers, and Jared Bernstein who had been an adviser to Joe Biden as vice president is now on the Council of Economic Advisers in the Biden administration, to kind of write a white paper that very vaguely laid out what the problems were with previous programs and what might constitute a better alternative, which later became opportunity zones. EIG likes to talk about this as if it was thought up by two economists, one Democrat, one Republican, that’s a bit of a stretch, they kind of laid the foundation.

And then Lettieri and Glickman built a very impressive bipartisan coalition to support this idea. I don’t think people who endorsed it really thought about the details, the details that I think are really important, but the general idea was very popular. Who could be against getting money to poor communities? And their key was that they recruited Cory Booker, the senator from New Jersey, a Democrat, and particularly Tim Scott, a Democrat…I mean a Republican from South Carolina. And they had the perfect diversified portfolio. They had enough Democrats and enough Republicans so that no matter who won the 2016 election, and they, like everyone else in Washington assumed it would be Hillary Clinton, they were well-positioned.

Well, as we all know, Donald Trump won, the Republicans in control of the Senate started working on a big tax bill. And Tim Scott was really one of the only four senators who was key to how the details of that tax bill went. And Tim Scott really believes in opportunity zones. Tim Scott had an opportunity agenda long before he met Lettieri, Glickman, and Sean Parker and he’s understandably, as a black man, very interested in talking about Black Lives Matter and police and opportunities for black people and discrimination that he’s faced as an individual with a rather conservative approach to public policy, which includes tax breaks are better than spending increases.

And Scott became pivotal to getting this into law. In fact, it wouldn’t be there if not for Tim. It wasn’t in the House version of the Tax Cuts and Jobs Act. Paul Ryan, the former speaker, embraces it now, but at the time, he was trying to keep the tax code simple, and he wanted to get rid of some tax breaks like this. But Scott made sure it was in the final version of the tax bill, without very many people paying attention to it because there was so much other stuff going on, big corporate tax cuts and stuff.

Jimmy: That’s right. And we had these opportunity zones tax policy provision that got packaged into the larger Tax Cuts and Jobs Act but unfortunately, along the way, some of, possibly some of the most important elements of the opportunity zones legislation got stripped out because of the Byrd Rule. Can you tell us exactly what happened there and why that led to one of the biggest shortcomings of the opportunity zones tax policy?

David: Right. So I think there were some problems with the legislation as drafted to begin with. Although the EIG and the people that they hired had done a lot of work to write the legislation, and there have been several iterations of it, most of them went to making it more attractive to potential investors and spent less time thinking about how it might be used. Because it didn’t go through the normal process…or not the normal, the ideal process of having a hearing and having people who have experience in place-based tax policies, publicly making observations, getting some input from the Treasury, the way more successful programs are.

The bill, as it went into the Tax Cuts and Jobs Act, had a lot of problems. But as you point out, the bill did provide for more reporting, and one of the shortcomings of the law is that there’s now no reporting. Well, how can that fall out?

As we’ve learned recently, in order to get a bill through the Senate with a majority, but not a supermajority of votes, in order to avoid a filibuster, both Republicans and Democrats use this process called reconciliation. And the reconciliation process allows a bill to pass with only 50 votes, 51 votes as the Vice President breaks the tie, but it can only be used for bills that involve spending and revenues. And individual provisions can be stripped out of the bill if the parliamentarian says this violates the so-called Byrd Rule, the rule which is actually now law which says that bills that come through the Senate reconciliation can’t be doing things that don’t affect taxes or spending. And this provision was seen as one of those.

The Democrats, at the time the Tax Cuts and Jobs Act was pending in 2017, knew they couldn’t defeat it, so they wanted to make life as hard as possible for the Republicans. So they went through the bill and found everything that could violate this Byrd Rule and insisted to be taken out. And it got so ridiculous that the title of the bill, as originally written, is the Tax Cuts and Jobs Act, but a senator objected to that saying that title didn’t affect taxes and spending, so the title is not in the legislation. It’s called an act to reconcile blah, blah, blah, blah, blah, some technical thing. So it was a result of Democrats pushing hard to make life miserable for the Republicans.

It is interesting that in the report language, which is kind of like a supporting document that hasn’t had the force of law but tells you what Congress was thinking, there were some…there was a language that suggested that, at least at some point, people wanted the Treasury to have more role in overseeing who was an opportunity fund, and what could that money be used for. But the way the law was written, the Trump Treasury interpreted as not giving them a lot of clout or they didn’t use the clout they had, including…they did a reporting form eventually, but it was relatively limited and there’s no requirement that the Treasury make that stuff public and so forth.

Jimmy: Right, as you pointed out a few minutes ago, in some ways, this is a great success story, especially from EIG’s point of view. I mean, this is very impressive, the coalition that they were able to build there, and the idea of building a defensible group of individuals that could help push the idea through no matter who was elected president, and what the balance of power was in Congress was brilliant. But the devil is in the details, as always. What did the bill get wrong in your view?

David: That’s a really good question. And I’m still thinking about the answer. The way the bill is written, it has a list of what are called sin businesses that are lifted from previous legislation. And it’s not very up-to-date.

Jimmy: The sin businesses are defined by the Internal Revenue Code that’s focused on the New Markets Tax Credit Program, which is 20-plus years old at this point, I believe.

David: Right. So as you may have seen, there’s a story recently, I saw, that someone who has an opportunity fund is investing in a Bitcoin mining facility in Miami, which obviously will use a lot of electricity, but it’s not gonna employ anybody who lives there or become much of an asset to the community. I write in the book about a number of people who have used the opportunity zone funding to build self-storage facilities. And I don’t think that those actually do much for our community. I mean, they’re nice to have, but we don’t need to subsidize them with tax breaks.

The way that the law defines communities eligible for designation…as census tracts eligible for designation, allowed for a number of college towns that aren’t really poor but just happened to have a lot of students in them, and the students show up as no income on the census to be designated, foolishly, in my opinion, by governors as opportunity zones, and so they’re building a lot of luxury student housing there, which similarly…I’ve got nothing against it, but I don’t think we need to encourage that with tax breaks. So one thing is, should they have thought more about what things are opportunity zones not to be used for.

Secondly, there is no requirement that opportunity funds even pretend to be helping the people in their community. You don’t have to show to anybody or even just assert on a document that your project is gonna benefit the people who live there. Some earlier versions of place-based policies going way back to Jack Kemp’s enterprise zones included tax breaks for if you hired locally. And so I think that there could have been a tighter link between what an investment does and who benefits from it.

It’s a pretty big argument about whether you want the Treasury to have more role and the Treasury have to approve everything the way they do with the New Markets Tax Credit. And I understand the argument. Some people say, “Well, that would mean everything would be just what the Treasury said was appropriate,” and other people would say, “Yeah, but we’re trying to get away from that. You create enough red tape. Nobody…only people who get to take advantage of the tax break are the real pros who there’s an industry around new markets tax,” right? And so I’m not sure what the answer is there.

Jimmy: It’s a fine line to walk, right?

David: Yeah, I mean, this is always true in tax policy in Washington. Congress always tells the Treasury, we want you to write rules. You can see this in some of the COVID stuff. There should be no stories in the newspaper that identify abuse. And there should be nobody who’s entitled to the program who complains it’s too bureaucratic. I just think that in this case, they got the…they put it too far on one end.

And then the other thing was that…and so 56% of the census tracts in America were eligible for designations. Governors could choose from that list, up to 25% of the zones…of these tracts to be opportunity zones in their state. And I think there were a couple of things wrong with that. One is the whole thing was so rushed, and a lot of governors didn’t know what they were doing.

I spent a lot of time looking at what happened in the state of Oregon, which is a relatively clean process, no allegations of corruption or favoritism. But you can see, like, from their emails and texts that this thing passes, they can’t even figure out, is this just talking points for the White House or is this really a proposal? And they had to make decisions so quickly, that I think a lot of them made foolish decisions.

It was tough because you had to decide. I designate the very worst communities in my state, I’m not gonna get any money because opportunity zone investors, having lots of other zones to choose from, will put their money in some other state, but if I pick only really up-and-coming areas that are already attracting capital, I’m gonna be accused of just fueling gentrification or rewarding projects that would have been done anyways, Oregon sort of did 50/50. So I don’t think they thought through enough what would happen if you have 8,764 opportunity zones, how much of the money would go to the, if you will, the least deserving of them.

Jimmy: Right, the least deserving and possibly the ones that are already on the upswing and can present investors with the highest returns or highest projected returns. It’s a Goldilocks problem, you gotta find the ones that are just right.

David: Exactly. One other observation and this is more political than economic. Obviously, if you do a provision like this, you’re interested in appealing to people who have money because if you don’t have any money, you’re not gonna…no tax incentive is ever gonna get you to invest in anything in a poor community, or a rich community. But the way it’s written, really, the only people who can do it, only the rich can play, are people who have unrealized capital gains. And I think that makes them vulnerable to the charge that this is just a tax break for the rich, cloaked in a way of helping the poor.

So there are proposals floating around, is there some way to get…allow people who live in a community to get a stake in a project that’s funded by opportunity zones projects, or people to get a tax credit, even if they don’t have an unrealized capital gain. I think…I don’t think that would have made a huge difference in dollar terms because people don’t have money, they’re not gonna be investors, but it would have rooted the thing a little bit more in the communities in which the projects are done, and might have protected it from some of the political criticism it’s got.

Jimmy: Yeah, I agree there, the perception has been tough at times. I would love it if they would open up the tax breaks to non-capital gains money. So if anybody has any non-capital gains, maybe someone who’s not an accredited investor, doesn’t have tens of thousands, or hundreds of thousands, or millions of dollars of capital gains to work with putting a little bit of money here and there and get access to this program, just get a little bit of skin in the game, that would be a positive change, and hopefully, something like that comes to pass at some point.

David: I live in Washington, DC, and the city government has some extra incentives for opportunity zones investors. But in order to get them, you have to kind of go through some local approval process and show that this is really good for the community. So the fact that…I totally get why having community involvement, it can be a real hassle. I mean, we know in America that one reason it’s so expensive to build infrastructure is that anybody can claim that your environmental impact statement is incomplete and go to court and tie up some project for years. That’s why it takes so long to build a new highway or a bridge or a tunnel or even a bike path in some parts of the country.

Again, I think the problem with opportunity zones is there’s so little role for the local community, that this feels like some aliens coming in, who are just looking to take capital gains tax breaks, and put up something next to my property.

Jimmy: Yeah. I do think some of the best projects that I know of do take that effort to work with the local community because they don’t want to come in and disrupt the local community. But let me ask you this, just to zoom out a little bit. The context for this entire program is this idea of geographic inequality, as you mentioned a few minutes ago. And EIG reported this in a white paper several years back, pre-passage of the bill, in what they called their distressed communities index, essentially, illustrating how many of the nation’s poorest zip codes fell further behind after the recovery from the last great recession.

And I should point out that this is repeating itself again with the recovery from the COVID-19 pandemic. So this is rooted in place-based policy theory. My question to you, David, is can this type of tax policy work? Can place-based policies that address geographic inequality work?

David: Place-based policies better work. Our country will become even more divided than it is now. There’s a scene I have in the book where Larry Summers, the economist, the former Treasury secretary, it was at an event at the Brookings Institution, and he says that economists, in general, have disliked place-based policies, they prefer people-based policies. Give somebody an education, and they’ll do better. And if they live in some godforsaken place in the Midwest that’s decaying, help them get a bus ticket to go to Austin or San Francisco.

And so economists, hard-hearted as they are, thought, let’s not waste a lot of money trying to save a community where nobody wants to live, let’s help the people directly. And if they live in poor communities, that will help the community, but if they leave, good for them and good for the country.

Well, I think that idea has waned for a couple of reasons. One is, it turns out that people really don’t like to move. People have networks and their families and just picking up and moving to a more prosperous place, even though there’s a history of that in the United States, and of course, immigrants do that all the time, a lot of people don’t wanna do that. I mean, that was sort of the lesson I drew from J.D. Vance’s book about how people move from one lousy community in Appalachia to a slightly better community in Ohio because that’s where their relatives are.

Secondly, people don’t move as much as they used to. Geographic mobility, moving from county to county in the U.S., is declining. And the share of people who are not working, adults who are not working even before COVID, in these left-behind communities is shockingly high. And so just the whole economy cannot work and people cannot prosper in that situation.

And then finally, to tell you the truth, I think a lot of economists were a bit shocked that Donald Trump won. And they discovered that one reason that Donald Trump won was that there were a lot of people in left-behind communities who are really angry, and they voted for Donald Trump. So the economists in the center and the left said we better do something for them.

So I think we have to do something with place-based policies. The question is, how much can you do through the tax code influencing private investment? And how much do we have to do just with direct federal money, doing those things that make a place more attractive for private investors? The proponents of opportunity zones are very heavy on that, let’s create tax incentives, private money will go into these places, and all good things will follow. And it doesn’t really matter what the money’s gonna be used for because every investment in the community is good.

I think that they went too far in that direction, and that we need to have a better marriage between what the government spends money on, and what we want the private capital to do. And we probably have to think harder about how to structure these programs so they do go for the purpose of which they’re intended, but don’t become so complicated that nobody except somebody with a lot of patience will invest in.

Jimmy: At one point early on in your book, David, you bring up the fact that many of these types of well-intended initiatives oftentimes fail because of the intractability of the social problems that affect our nation. I kind of feel like opportunity zones obviously can’t be the full solution to the societal problems and the inequality that it’s trying to address. In my view, it’s just one more tool that helps to move the needle in the right direction, or at least that’s what the intent of the program is. Are the expectations of opportunity zones simply just too high?

David: I agree with the premise of your question. And I think the answer to that is yes because the opportunity zone PR machine got ahead of itself. And some of the stuff particularly frankly, during the Trump administration, Scott Turner’s motivational speeches, that was the former NFL player who led the Opportunity Council that the White House, the Trump White House set up, made it seem like this was some revolutionary idea that was gonna be an inflection point between despair and poverty, and wealth and optimism. So there was way too much hype about what it could do. I totally agree with that.

Jimmy: Yeah, well, put another way, the effects were overpromised in some way.

David: Yeah, and also, the President, Trump, he turned this into anytime anybody said, “Are you doing anything for black people in America?” He mentioned opportunity zones. And obviously, if there’s an opportunity zone investment in a poor black community, you can really make a difference to the people who live there. But he kind of over-invested in opportunity zones as the answer to every issue raised. But Jimmy, I wanna make clear, there’s one thing I feel really strongly about which is, I am not saying that opportunity zones cannot and are not being used for their intended purpose, I think they are. Martin Muoto and Gray Lusk at SoLa Impact in South LA doing affordable housing with opportunity zone LA…

Jimmy: Oh, yeah, I was about to ask. It hasn’t been all bad, right? I am curious to hear about a lot of the positives that you’ve seen come out of OZ policy.

David: I wanna point out that there’s nothing to require the positives. And I fear that market forces, completely honest, legit return-seeking investors that are naturally gonna go to the lower risk projects across the country, like I talk a lot about the Ritz Carlton in Downtown Portland. But I have several examples in the book about things that…where it’s being used for the intended purpose.

There’s a guy named Brendan Schreiber in Baltimore, which doesn’t get nearly as much opportunity zone money as I think it should, given both the problems and the potential of Baltimore. And he’s basically…there’s like five or six-row houses, all but one of them were unoccupied, and he’s able to cobble together a number of different programs to get to be able to renovate them and make them into small business space on the first floor, and kind of small apartments above where he imagines the entrepreneurs who are doing business on the first floor would live. I just heard recently, he finally closed the deal with a lot of help from a guy named Ben Seigel, who’s the opportunity zone coordinator in Baltimore.

Absolutely my favorite is SoLa Impact in South LA. Martin Muoto, a really interesting guy, Nigerian mother, Polish father, immigrant to the United States, goes to work and goes to private equity and does all that stuff that private equity people do, dabbles on real estate on the side, and ends up building a little business that is doing affordable housing in South LA, Compton, Watts, places like that, essentially buying old small apartment buildings, renovating them, and renting them to people many of whom are on Section 8 federal subsidies. And they have a little social service thing on the side and they’ve now expanded…they bought some warehouses. They call it The Beehive and they’re turning it into an incubator for small businesses.

And Martin Muoto and his partner, Gray Lusk, were raising money the conventional way. Some people affiliated with Jim Sorenson in Utah pointed out to them. Jeremy Keele is the guy that they’re in an opportunity zone, and they really ought to…could raise a lot more money on opportunity zone money. And Martin and Gray said, “Forget that. We don’t wanna have anything to do with any government programs. It’s just a pain in the neck.” Jeremy Keele came back to them and said, “You guys are crazy.”

And so they took the bait and they’ve managed to raise a lot more money much more quickly with opportunity zone money, in part, because there are a lot…a number of institutions, banks, and other financial institutions after Black Lives Matter and George Floyd and all that, had committed to put money into poor communities and didn’t know how to do it, and SoLa Impact has managed to take advantage of that.

So they’re a great example of people who were doing good work and are raising more money more cheaply because they can deal with opportunity zone own investors. And if that were the predominant story, I would feel a lot better about opportunity zones.

Jimmy: Yeah, that is a great success story. I’ve had Martin on the podcast once or twice before in the past. I’ll link to that episode in the show notes for today’s episode. A phenomenal success story down there. And just his personal story, as you mentioned, is fascinating just how he came to this country with no money in the bank and essentially pulled himself up by his bootstraps. And now he is paying it forward with a lot of the work he’s doing in South Central Los Angeles. He started buying properties there a long time ago because he recognized an opportunity where nobody else did.

So that is a fascinating story in a very good case study of how opportunity zones can work. But you know, as you rightly point out, a lot of stories around opportunity zones are somewhat negative. How, David, at the end of the day, would you improve opportunity zones? You’ve illustrated some of the biggest problems with OZs in terms of the statute, and the regulations, and the zone designation, and some of the actual results on the ground now. Feel free to expand on those points if you want, and then answer this, how would you improve opportunity zones ultimately?

David: I would revisit the zone designation process with up-to-date data. And I would make sure that zones being designated really are low-income communities. And I might actually reduce the number of communities so that there weren’t so many opportunities to invest in places that really don’t need the money. Secondly, I would limit what the investments could be used for. Third, I would probably have more oversight from the Treasury. Instead of self-certifying as an opportunity fund, maybe a little more oversight from the Treasury.

Four and this is uncontroversial, a lot more reporting. I wanna make sure that 10 years from now, some really smart economists can take all the data and look at places that were eligible for opportunity zone designation, and zones that were designated and see what really happened there to not only to the housing prices and building permits but what happened to the people there.

And I think as I said earlier, I would find a way to open this up to people who don’t have a lot of unrealized capital gains. If we wanna do something like this, we wanna have more community participation. We’re gonna have to find a way to let people participate even if they don’t have money. Then after we get done with that, I’m sure I can think of six more things, but you probably have six of your own.

Jimmy: Oh, sure, well, reporting’s definitely near the top of my list, as well. I’ll give you a couple of points on my list. I would like for them to extend the program, maybe push back the end date by a couple more years. It’s scheduled to sunset at the end of 2026. I feel like there were a lot of false starts getting this thing off the ground. It took a long time for the IRS to finish up the regulations. COVID imposed further delays.

And I think it would be nice to push back that window a little bit further out into the future. And then yes, of course, you’re right to point out that your…probably your most uncontroversial suggestion is the reporting. I haven’t met a single person who says, “No, I definitely don’t want any more reporting.” Everybody wants more reporting.

David: Right, but you’ve gotta be careful, though.

Jimmy: Yes.

David: Some people want more reporting to the IRS. And the IRS has lots of rules about what the data can be used for and not. I wanna make sure that the reporting, I don’t want everybody to have to show their tax returns to the public or anything, but it has to be available to other parts of the Treasury and outside researchers who can actually look at the trends and not…you know, the IRS can only share data with the other parts of the Treasury, if they can show, they can declare that it’s for purposes of tax administration or something. So some of the proposals for reporting are all IRS concentrated and they won’t be as useful to researchers as if they were more broadly done and let alone what becomes public.

I mean, I think we ought to be able to see a map of the United States, and how much money went to each opportunity zone as long as you…and to identify what it went for, as long as…if there’s only one or two investments, you’d have to suppress some data for privacy reasons. And not all the reporting bills see it that way.

Jimmy: Right. And then there has been some early reporting that’s come out. The Joint Committee on Taxation had a report that came out, and there was that UC Berkeley study that came out a few months ago earlier this spring that does dive into some of the effects.

David: That’s right. I mean, that’s actually the same study, because the guy at Berkeley works for the Joint Committee. So they got to look at 2019 opportunities fund tax returns that were filed electronically. Apparently, a quarter of them were filed on paper. So they don’t have that data. And they don’t have any data from 2018 because the IRS collected the data in a way that’s hard to digitize or something. And what they found though was interesting, 84% of the zones got no money, half the money went to 1% of the zones. And that’s the kind of thing that’s worrying me.

Jimmy: Right, exactly. So yeah, some more transparency into where the money is going, I think would be welcomed by everybody in the industry. Well, what, David, do you feel will ultimately be the legacy of opportunity zones or is it still too early to tell?

David: I think that one of the things that hurt opportunity zones was, although, as you and I have discussed, it really was pretty bipartisan in the beginning, it got branded as a Trump tax cut. So there are a lot of people who think it was, you know, Donald Trump and Jared Kushner thought this up. And we know that’s not the case. Jared Kushner might have taken advantage of it. But if you have a tax break that’s favorable to real estate, it’s not surprising that some of Donald Trump’s circle take advantage of it since they’re in real estate.

So one of the problems that it has is it is branded as a Trump tax cut. I think that’s worn off some. It’s fallen out of the headlines. So I think there’s enough bipartisan support for the idea that it probably won’t be repealed. I worry, though, that there’d be such disagreement about how to fix it, you have some proposals, as you suggest, to extend it, some people wanna make sure…have proposed that if capital gains taxes go up, you should still get to pay capital gains taxes in 2026 on the old rate. So there’s all that stuff going on.

And then there’s people like Ron Wyden who want to really curtail the program substantially. And what I worry about is that there will be so much disagreement that nothing will change and the program will just bump along and gradually it’ll expire at some point.

President Biden, as you know, during the campaign, promised to reform it, but he has done nothing. And none of the bills that he proposed, nothing pending on the reconciliation bill in Congress and nothing on the regulatory front has been done at all of any consequence, some little things. And so I worry that the reform will, I don’t know, stagnate because they can’t come to an agreement on what it is they’re trying to fix and how to fix it. It’ll be just a tug of war between people who like them and don’t.

Jimmy: Yeah, only time will tell, right?

David: That’s all we can say in conclusion.

Jimmy: Well, David, I wanna thank you for joining me today. The book is fascinating. It tells a fascinating story of how this program came into existence, as I mentioned, and really does a really good look at what’s happening on the ground with opportunity zones, the good, the bad, and the ugly. Before you go, David, can you tell our listeners where they can go to learn more about you and where they can go to find out more about your book?

David: Well, first of all, let me say, Jimmy, that I really admire what you’re doing. I particularly like the fact that you put the transcripts up, so I don’t always have to listen to the podcast because you can skim them and see, but you’ve had such a wide array of people on the show, and it’s been part of my reporting is to read these and listen to these podcasts. So I’m really glad you’re doing what you’re doing. I made a little website called www.davidwessel.net. And you can also find out lots about me on the Brookings website where I’m doing lots of things that have nothing to do with opportunity zones, ranging from the debt ceiling to does the Federal Reserve know what it’s doing.

Jimmy: Fantastic. Thanks, David. And for our listeners out there today, I will, as always, have show notes on the Opportunity Zones Database website. You can find the transcript and links to all of the resources that David and I discussed on today’s show. Those show notes can be found at opportunitydb.com/podcast. David, great having you on the show today. Thank you.

David: You’re welcome.

Jimmy: That’s it for our show today. A huge thank you to you, our listener. If you liked this episode, please rate and review us on iTunes. The “Opportunity Zones Podcast” is produced by the Opportunity Database. Visit opportunitydb.com, to learn more about opportunity zones and opportunity zone fund investing. You can learn how to subscribe to this podcast and read more about today’s guests in the show notes by visiting opportunitydb.com/podcast. And we’ll be back soon with another episode.