Democrats Launch Inquiry Into Opportunity Zones Program

The Opportunity Zones program is drawing scrutiny from Democrats in Congress, who on Wednesday said they would investigate whether Trump administration political appointees tried to steer potential tax breaks to associates by interfering with the initiative in Nevada.

Lawmakers are also requesting that a government watchdog review the economic development program, while the top Democrat on the Senate Finance Committee, Sen. Ron Wyden, introduced a bill aimed at shedding more light on Opportunity Zones investments.

Wyden’s bill also seeks to phase out some zones that don’t encompass low-income communities, although it would give  states a chance to select new ones in their place.

The Oregon lawmaker called the program “troubled from the start” and said the Treasury Department “has been steering potentially billions in tax breaks to Donald Trump’s friends.” 

“There are no safeguards to ensure taxpayers are not simply subsidizing handouts for billionaires,” Wyden added in a statement. “Republicans who support the program should work with Democrats to ensure it does not become a boondoggle.”

Opportunity Zones were established under the sweeping 2017 federal tax overhaul. The program provides generous capital gains tax breaks to investors who put money into special “opportunity funds” that are supposed to invest in struggling census tracts designated as zones.

House Ways and Means Committee Chairman Richard Neal is joining Wyden in spearheading the investigation, which focuses on concerns raised by a recent New York Times article that political pressure influenced the selection of a zone in Storey County, Nevada.

TheTimes story describes how Michael Milken, an infamous financier in the 1980s, could benefit from that zone’s selection and suggested that the Treasury Department ignored its own guidelines in allowing the Storey County census tract to become eligible for the program. 

It also outlined how Treasury made changes to the program’s rules that an institute Milken founded—as well as others—had pushed for.

Milken wrote a five-page letter pushing back against the article, which he called “deceitful” and a “hit job.” “I made no attempt to influence, nor did I speak to anyone in government (or the Milken Institute) about proposed changes in opportunity zone regulations,” he stressed.

Wyden and Neal in a Nov. 4 letter to Treasury Secretary Steven Mnuchin requested a variety of information, including email correspondence and details about meetings related to the selection of the Storey County zone. They asked for a response by Nov. 25.

A Treasury Department spokesperson responded to a request for comment on Wednesday by referring to statements the department issued last month calling the Times article “highly inaccurate” and “deeply misleading.” 

Treasury emphasized at the time that neither Mnuchin, a former banker who knows Milken, or anyone else at the department were aware of Milken’s investments in Storey County.

The department also said including the Storey County tract in the program was proposed by former Nevada Gov. Brian Sandoval, and offered an explanation of how it fit with department guidelines.

Apart from the Nevada inquiry, Wyden is sponsoring a bill that would require opportunity funds to file annual returns with the federal government, disclosing a range of information about their dealings.

Examples of this information include: the value of various types of investments held by the funds, as well as details about businesses receiving investment under the program, jobs tied to those companies, and square footage and housing unit figures for real estate.

Additionally, the bill calls for the names of individuals who have investments in the funds to be reported, as well as the amount of money that they have invested.

The legislation would mandate that funds post their annual returns publicly online, though there are exemptions from posting information about individual investors.

While the Opportunity Zones program was designed to target low-income areas, it also allowed states to designate better-off zones that are “adjacent” to low-income communities. 

A summary of Wyden’s bill says that the initiative also failed to account for factors like college student populations, which might artificially inflate the poverty levels recorded in a community.

Responding to these issues, the bill seeks to narrow the criteria for zones.

It would sunset zones adjacent to low-income communities, as well as those with a median family income that is over 120% of U.S. median family earnings—unless such a zone has a poverty rate above 20% and an enrolled college student population below 10%.

Investments in these zones made before the date the bill was introduced, Nov. 6, would be grandfathered in, according to a spokesperson for Wyden. But no new investments in these areas would be eligible for the tax breaks the program provides.

States would be allowed to designate replacement zones for the ones that are phased out. But the new tracts would be on the same timeline as the current ones, expiring at the end of 2028.

Wyden’s bill would also tighten restrictions related to investments in “sin” businesses like casinos. This part of the legislation would expand these prohibitions to cover sports stadiums, storage facilities and luxury housing that is unaffordable for existing zone residents.

John Lettieri, president and CEO of Economic Innovation Group, a leading booster of the Opportunity Zones program, said Wyden’s bill reflects a number of the think tank’s priorities.

He pointed to the proposals for reporting requirements, strengthening the list of banned investments, and addressing “the small share of designations” that don’t match the program’s intent.

But Lettieri also said he’s concerned that the bill in its current form would have “serious unintended consequences that would undermine the broader policy and discourage long-term investments in low-income communities.”

“We are encouraged that there are many issues that can be addressed on a consensus basis in the weeks ahead,” he added.

Opportunity Zones were designed to spur investment and job growth in economically distressed areas. But because Treasury has not set requirements for the disclosure of detailed  information by funds it’s hard to know how well the program is working so far.

In the meantime, critics and news stories have highlighted examples of how investments under the program are flowing to real estate projects and areas that are safer bets and that may have attracted investment even in the absence of the tax break.

There are also reports, like the Times article focused on Milken and others about former New Jersey Gov. Chris Christie and President Trump’s son in law, Jared Kushner, that have spotlighted how politically connected individuals could benefit from the program.

But many supporters of the Opportunity Zones initiative continue to defend it. They say that it’s not surprising that early Opportunity Zones deals targeted projects that were low hanging fruit, and that there are promising signs the program is going to help hurting areas.

The program has enjoyed bipartisan support in the past. The latest efforts by Democrats in Congress, however, may be a sign that it is slipping into the realm of fraught, partisan politics that have overshadowed other federal programs during the Trump era.

Sen. Cory Booker, of New Jersey, who is currently running for the 2020 Democratic presidential nomination, was an early champion of the program.

But he joined Wyden and Neal, as well as U.S. Rep. John Lewis of Georgia, in requesting this week that the Government Accountability Office study the program’s effectiveness compared to other federal incentives, and also examine other aspects of the initiative.

In their letter to GAO, the lawmakers said a review of the program by the watchdog agency was “critical” in part because of the “breadth of the Opportunity Zone incentive,” and “the lack of reporting requirements under current law.”