Democrats and Republicans alike have hailed the Opportunity Zone tax credit as a brilliant idea to revitalize impoverished areas by encouraging investment in exchange for deferred taxation, but the New York Times, to its credit, recently ran a deeply reported article about the bipartisan program’s unforeseen—but not unforeseeable—consequences. It turns out that the tax credit—the brainchild of Facebook billionaire Sean Parker—has set off a gold rush to build high-end apartments and hotels, as well as storage facilities and student housing, in areas, like Miami’s booming Design District, that already attract lots of investment capital. The Times sees this as a case of friends of President Trump—son-in-law Jared Kushner’s family, hedge-fund billionaire Leon Cooperman, politically connected insiders like former New Jersey governor Chris Christie, and big banks—realizing a “windfall” by capitalizing on a program meant for the poor. But Opportunity Zones are just the latest misconceived and ineffective federal program that fails to grasp what makes cities thrive.
Opportunity Zones appeal to investors looking for big, tax-protected returns. The run-up in the stock market means that trillions of dollars in unrealized capital gains are parked on the investment sidelines, with beneficiaries reluctant to cash out and pay the taxes; the same reasoning underlies Trump’s recent suggestion to index capital gains against inflation, which would free up stagnant capital. Stimulating investment by lifting artificial tax barriers has merit, but the belief that targeting some 7,000 lower-income census tracts with a special tax credit will propel their residents out of poverty ignores a long history of failed urban-development policies.
Public housing has turned out to be perhaps the least successful of these. Planners leveled dynamic black communities like Detroit’s famous Black Bottom because their alleged “blight” offended liberal sensibilities, steering poor people away from potential real estate ownership to live in decrepit government-owned apartments. Building these projects was always understood as a bonanza for the construction industry, with developers winning sweetheart deals to build what would become substandard housing.
During Jimmy Carter’s presidency, Urban Development Action Grants were conceived—like the Opportunity Zones—to create partnerships with the private sector. The program became infamous for financing arenas and hotels, and HUD’s own evaluation reported that “federal funds have been awarded for projects that would have been completed without the UDAG subsidy.” The Low-Income Housing Tax Credit program, which, like public housing, consigns poor families to a lifetime of renting, costs the Treasury more than $8 billion in foregone income every year. The GAO has found that each housing unit is costly—as high as $349,000 in California, for instance. And, as with the Opportunity Zones and the UDAG, the program acts as a honeypot for politically connected developers. So, too, with the Section 8 “set-aside” program, which provides rent subsidies for developers of low-income apartments, as in New York’s sprawling Starrett City, in which Trump was once an investor.
What all these programs have in common is a mistaken theory of urban renewal and a confusion of helping people with helping places. Neighborhoods are not starved of capital because of the legacy of redlining or other conspiracies. To attract new residents and new investors, neighborhoods need certain fundamentals: safe streets and low crime, good schools, and attractive parks and amenities. Low property taxes help, too. Absent these advantages, investment incentives may succeed in gilding the ghetto but will not lead to truly healthy communities.
Physical improvements alone will fail to uplift the poor, as public housing history has shown. No substitutes exist for aspiration, agency, and education. Crowded Chinese and South Asian neighborhoods have proved that poor physical conditions are no barrier to advancement. That’s a lesson that government planners have yet to learn: self-help institutions flourished in many of the African-American neighborhoods leveled for public housing.
After decades of failed federal programs, cities should look instead to good local services and an inviting investment climate. Opportunity zones are just the latest example of how Washington gets urban improvement wrong.