November 16, 2021
House Ways and Means Oversight Subcommittee Chairman Bill Pascrell (D-N.J.) on November 16th called for greater reporting requirements for Opportunity Zones to better ensure that they improve distressed communities and not used as political payoffs.
“The program started with some embarrassing hiccups. In fact, one zone designation was reportedly expanded to benefit friends of Donald Trump and Steve Mnuchin. I expressed my outrage about that one to the Treasury Secretary,” Pascrell said in a hearing on these investments.
Opportunity Zones were created in the 2017 tax reform bill and provide tax incentives for funding improvements to distressed communities. Zone investors can defer taxes on invested gains in communities designated as “Qualified Opportunity Zones.”
But a recent government report found that the lack of data on Zones has prohibited the IRS from adequately ensuring that these investments are being implemented as Congress intended.
“IRS cannot fully execute its compliance plan as currently constituted, and the agency has not taken steps to adjust the plan and mitigate the issues that this lack of data causes,” states the Government Accountability Office (GAO) report titled “Census Tract Designations, Investment Activities, and IRS Challenges Ensuring Taxpayer Compliance.”
During today’s hearing, witnesses offered examples where the lack of reporting data on Zones has hurt compliance efforts.
“A comprehensive picture of investment activity in Opportunity Zones based on tax data is currently unavailable due in part to decisions around transcription of paper-filed returns,” said Jessica Lucas-Judy, Director of Strategic Issues at the GAO.
Lucas-Judy continues: “For example, some of IRS’s preliminary summary data on investors and funds is based only on information captured from forms submitted to IRS electronically. Other information from forms that were mailed to IRS, or emailed to IRS in a PDF format, was not fully transcribed from paper or PDF forms into IRS information systems. As a result, comprehensive aggregated reporting and analysis would be time- and labor-intensive for IRS to produce.”
That lack of compliance has allowed Zone investments to occur where they might not be best placed, according to witnesses.
“The available evidence and my reporting suggest that the bulk of the money is going to real estate projects that would have been done otherwise or projects that will not do much to improve the lives of the low-income residents of the zones,” said David Wessel, Director at the Hutchins Center on Fiscal and Monetary Policy, and Senior Fellow at the Brookings Institution.
Given that the IRS is overworked and understaffed, it is unlikely that the agency can provide new resources to clamp-down on Opportunity Zones. Brett Theodos, a Senior Fellow at the Urban Institute who testified today, recommended helping compliance efforts by narrowing the definition of Opportunity Zones.
“Particularly for real estate investments, which are the bulk of Opportunity Zones projects, the legislation should be adapted to a more narrowly defined set of community needs,” he said. “For instance, only real estate transactions where the operating business is the owner-occupant, commercial and industrial real estate in tracts with high vacancy rates, and housing sold or rented at below-market prices.”
Theodos would also support larger tax incentives for underserved areas that might not produce a good return on investment.
Wessel suggested that public input should help create the definition for what constitutes an Opportunity Zone.
He added, “if we can’t fix it for whatever reason… it should be repealed.”
Subcommittee Chairman Pascrell agreed with Wessel, saying, “it cannot exist in the way it currently is,” adding that “I’m for this program, but I see this heading over a cliff.”
Despite the Pascrell’s position, law changes to Opportunity Zones are likely a long way off. Congress is currently embroiled in a legislative tug-of-war to pass a $1.75 trillion budget reconciliation tax and spending bill that is expected to last into late December.
It is not likely that Congress will take up a measure reforming Opportunity Zones before it completes action on the budget reconciliation bill.
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