Is the Republican tax law supercharging gentrification?

The American economy may be doing better than it has in years, but not everyone is feeling the benefits. Growth is more geographically concentrated than ever, leaving huge swaths of the country behind.

One aspect of the tax law Republicans passed last year is meant to correct this: opportunity zones. These are distressed and impoverished areas, where investors can get extra breaks on their capital gains taxes if they choose to put their money to work there.

But will opportunity zones lift up the left-behind communities as advertised? Or will they just supercharge gentrification and the displacement of less fortunate Americans?

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Sen. Tim Scott, a Republican from South Carolina, got the provision into the 2017 tax bill. About 8,700 opportunity zones have been established so far across all 50 U.S. states, as well as Washington, D.C., and Puerto Rico. They were designated by state governments, working off a list of eligible census tracts, and the Treasury Department approved the selection. Here's how it works: When investors sell an asset, the profit is called a capital gain. They can defer taxes they would've paid on those capital gains for a decade if they immediately turn around and invest the money in one of the opportunity zones. If they hold onto the investment for at least seven years, they get a permanent break on 15 percent of those capital gains taxes. And if they hold onto it for at least 10 years, they pay zero capital gains taxes on all the profits they make from the investment in the opportunity zone itself.

By all accounts, Wall Street is extremely excited. And Treasury Secretary Steven Mnuchin once predicted that opportunity zones would bring in $100 billion in investments.

However, in the race to actually pass the tax bill, Scott's provision went essentially unnoticed and un-debated. While investment projects can't skip out on local laws and regulations, the federal rules for opportunity zones are not super strict, and President Trump's Treasury Department seems to be taking a very relaxed approach to supervision. For example, regulations released in October will allow as much as 30 percent of the funds that reap the opportunity zone benefits to be invested outside the zones.

Some criticism has focused on the rather ad-hoc process of selecting the opportunity zones. "The opportunity zone program is not very targeted to deeply distressed areas," the Brookings Institution declared in a recent study. "States had too much flexibility and their incentives were not aligned with Congress' goals for the program." Amusingly, gentrified Long Island City, the New York City neighborhood where Amazon had originally planned to build one of its new headquarters, got designated as an opportunity zone. When an interested policy group saw the state of California's initial selections, they pushed the state to eliminate 183 areas over similar concerns.

Yet, according to that same Brookings study, the average poverty rate of the selected opportunity zones is 29 percent, compared to a national average of 15 percent. Only around 200 of the opportunity zones, out of the 8,7000 selected, definitely fall into the low-poverty, high-income bucket. That's not ideal, but it's not a disaster either.

The deeper problem, if it manifests, will probably come from the paradoxical market nature of the program. Neighborhoods at low risk for gentrification are best suited to opportunity zones' stated purpose. But neighborhoods at high risk for gentrification are the most attractive to investors. And investors are free to pick and choose their projects, which zones they want to pump their money into, or if they want to be involved at all. Less than 20 percent of U.S. households hold unrealized capital gains, and less than 6 percent of Americans will pay any capital gains taxes for 2018. These investment choices will be made by a small slice of the population with a disproportionate amount of power, who will most often be far removed from the communities they are ostensibly helping. Even if a majority of the opportunity zones selected were a relatively good fit to the programs' purposes, most of the money could still flow to the small number of places that weren't.

A New York real estate firm — co-founded by White House advisor Jared Kushner, no less — basically told its investors it would ignore most opportunity zones because of their poor prospects and instead focus on a "small subset" of areas in major cities like Miami, Los Angeles, and Seattle. Meanwhile, former White House communications chief Anthony Scaramucci is trying to put together $3 billion in opportunity zone investment aimed at projects in Savannah, Georgia, and Oakland, California. "For those of you who have yet to go to that part of the Bay Area," he declared, "I can tell you that it is fully gentrifying." The real estate industry is already pumping out reports that explicitly identify the minority of opportunity zones where gentrification is already happening.

"There are some projects that have probably come online because they're in opportunity zones," Marcy Hart, a Philadelphia real estate tax lawyer who advises on the opportunity zones, told The Associated Press. "But my clients were already investing in these areas."

Take Oakland, which Scaramucci mentioned: Gentrification is either already happening or is about to happen in around 93 percent of the low-income neighborhoods there. African-Americans fell from 35 percent to 24 percent of the population, from 2000 to 2017. Similarly, reports were already noting that gentrification was underway in Long Island City well before the tax bill was passed. The future is hard to predict, obviously, but it seems likely the opportunity zones will speed up the pace of change in these places.

The weakness of the opportunity zone approach ultimately lies in the old "job creator" mythos that has long surrounded investors. We assume that good jobs and wages come from rich people parking their money in particular projects. But really, investors chase markets and consumer bases that are already prosperous, or where those markets and consumers are soon to show up. They want to maximize profits, after all. Private investment is much less likely to turn struggling Americans into prospering ones. It usually displaces them — which gets back to the gentrification issue. Studies suggest the people displaced by gentrification are more likely to experience a bout of homelessness, and often wind up in even poorer areas, facing increased risks from crime and pollution, longer commutes, stress, and other burdens.

Still, can the opportunity zone policy be salvaged? Jared Bernstein, a left-leaning economist who worked on the idea, wrote: "I suggest we give [opportunity zones] a chance, while scrutinizing their progress. That will require the Treasury to dictate strong reporting requirements that will accommodate thorough evaluation." The Brookings study had a similar recommendation for getting the most out of the program, while also calling for more accurate targeting and regulation. There are also long-standing rules of thumb for how to economically revitalize a neighborhood without exiling its residents: pass rules to protect tenants and the existing affordable housing stock while building more public and affordable housing. Future policymakers and regulators could always return to the subject of opportunity zones and build these sorts of requirements into the deal.

Under the best case scenario, opportunity zones could at least help at the margins. We'll have to see.