Democratic lawmakers are intensifying scrutiny of the tax law’s opportunity zone incentives—but industry professionals said Congress’ heightened interest likely won’t have much of a ripple effect among investors outside of Washington.
Lawmakers have called for watchdog investigations and introduced bills that would tighten requirements for the tax perk after the New York Times reported late last month that Treasury ignored its own guidelines when selecting areas eligible for the tax break, a claim the department has refuted.
House Ways and Means Committee Chairman Richard Neal (D-Mass.) and Senate Finance Committee ranking member Ron Wyden (D-Ore.) on Nov. 6 upped the pressure further, announcing a probe into the designation of an Nevada opportunity zone named in the Times story.
Movement on the Hill likely won’t fluster investors eager for the chance to defer or reduce their capital gains tax liabilities by investing in so-called opportunity funds.
“This is sort of the inevitable. The discourse in D.C. these days seems to politicize any policy, program, period,” said Alex Flachsbart, founder of Opportunity Alabama, a nonprofit that connects investors with projects in low-income areas of the state. “Frankly, a lot of the noise that happens on the Hill doesn’t make it to the outside world.”
“While the articles may have gotten the attention of some lawmakers, I haven’t really seen an impact on the market,” said Lisa Zarlenga, a partner at Steptoe & Johnson LLP and former Treasury official.
Wyden on Nov. 6 released legislation that would make various changes to the opportunity zone incentives, but it is unlikely to pass in its current state. Democratic lawmakers have introduced bills to make various changes to provisions of the 2017 tax law, including its cap on state and local tax deductions, but none have been successful thus far.
Wyden’s bill would require that at least half the units in rental projects benefiting from the incentive be occupied by individuals whose income is 50% or less of area median income. It would also remove some relatively higher-income tracts designated for the incentives, allow states to add new ones, and impose monetary penalties on funds that don’t comply with its information reporting requirements.
Some of the bill’s changes would bar investments that have already been made from qualifying for the tax breaks, said Steve Glickman, who helped engineer the policy and advises opportunity fund investors as CEO of Develop LLC.
John Lettieri, president of the Economic Innovation Group, which helped develop the incentives, said Wyden’s measure “overshoots the mark” in several ways and could have a bit of a chilling effect on what is already a fragile market.
“That said, it’s a draft bill. It’s not going to get passed tomorrow,” said Lettieri, who met with lawmakers last week to discuss ways to improve the policy.
A spokeswoman for Wyden wouldn’t comment on whether Wyden would be willing to roll back any components of the bill. He is eager to work with Democratic and Republican lawmakers to get the changes enacted, she said in an email.
Flurry of Activity
Lawmakers have taken several steps beyond the Wyden bill to gather more information on the results of the tax breaks.
A bipartisan trio of lawmakers from Ways and Means—Reps. Ron Kind (D-Wis.), Mike Kelly (R-Pa.), and Terri Sewell (D-Ala.)—introduced a bill on Nov. 6 that would establish reporting requirements for opportunity funds.
Transparency advocates have argued that the government should collect more data from investors so the public can judge whether the policy is actually helping low-income areas.
Three Democratic lawmakers on Oct. 31 called for an investigation from Treasury Department Acting Inspector General Richard Delmar into Treasury and White House officials implementing the tax break. A Nov. 6 letter called for a probe from the Government Accountability Office.
Congressional investigations and talk of major changes to the way opportunity zones work are unlikely to move the needle for investors, however, said Brett Theodos, a senior fellow at the Urban Institute who attended a recent Capitol Hill meeting to discuss potential improvements to the program.
“I stopped believing in the Bogeyman when I was a child,” he said in an email.