Opportunity Zones Fuel Corruption

August 6, 2018

The federal government dispenses unequal treatment to Americans through subsidies, regulations, and narrow tax breaks. The unequal treatment generates lobbying and corruption as the government-determined winners dig in to defend their lucre and the losers agitate for a share.

Washington is a universe of thousands of separate special-interest galaxies, each with spiraling masses of lobbyists orbiting politicians and bureaucrats whose power is a gravitational force. Scientists say that the universe is mainly filled with dark energy, and the same is true of the nation’s capital.

The Tax Cuts and Jobs Act of 2017 created a new special-interest galaxy called “Opportunity Zones.” O Zones are tax structures that infuse governors and U.S. Treasury officials with the power to divide every state in the nation into winner and loser areas. Projects in the winner areas receive capital gains tax breaks, while projects in the loser areas get the shaft.

O Zones are already generating dark energy, as a recent Washington Post story illustrates:

The Treasury Department last week reversed itself after lobbying by Nevada Republicans and agreed to let a previously ineligible county reap huge benefits from the new tax law.

The effort was led by Nevada’s governor, Brian Sandoval (R), and Sen. Dean Heller (R-Nev.), who separately spoke with Treasury Secretary Steven Mnuchin and pushed for Storey County to win designation as an “Opportunity Zone,” which was established in the law to help distressed areas attract money.

Working behind the scenes to help the effort was a Storey County brothel owner and real estate investor, Lance Gilman, who told local officials that the designation could lead to a surge of investments within the next few years. Gilman is also a major GOP donor and made a $5,000 campaign contribution to Heller in the midst of the process, the biggest contribution he had ever given to a candidate for federal office.

Treasury officials had initially deemed that Storey County’s income levels were too high to qualify, based on the metrics they had used to judge every other nomination for the special tax status. But after weeks of prodding from Nevada officials, Treasury relented and gave the designation to Storey County using new data.

The successful campaign to win this lucrative designation illustrates how political pressure can redirect billions of dollars in federal benefits, which are supposed to be distributed in a non-arbitrary manner.

It shows how the new tax law, meant to simplify the tax code when it passed in December, is creating opportunities for gamesmanship — in this case by public officials and business executives seeking to exploit the Trump administration’s discretion in interpreting the law.

…several other Nevada business owners are furious at the designation. To push Storey County for the Opportunity Zone designation, Sandoval had to withdraw the April 20 nomination of Dayton, Nev., an economically depressed neighboring community that lacks Storey County’s huge industrial center.

This has led to accusations of unfairness, and several executives said they haven’t gotten the straight story about why their nomination was pulled without their knowledge.

Unequal treatment generates bad feelings and divisions, negative forces in the universe. The dark energy of O Zone corruption was entirely predictable, and there will probably be lots more of it.

Corruption has similarly swirled around the federal LIHTC tax break, which empowers officials to make winner and loser decisions in local communities, as Vanessa Brown Calder and I discuss here and here.

Vanessa and I have further thoughts on O Zones herehere, and here.

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