GOP’s Beloved Low-Income Area Tax Break Could Get Stricter Rules

(Bloomberg) -- The House tax-writing committee is pushing bipartisan legislation to revise a break for investments in distressed areas, following concerns that the areas most in need aren’t reaping the most benefit.

The legislative push comes after a wave of criticism that investors in areas known as opportunity zones aren’t required to report their assets or economic impact to the Treasury Department. Opportunity zones have come under fire for encompassing areas, such as parts of Brooklyn or Portland, Oregon, that would have been developed without the tax incentive.

One of the proposals would require funds investing in opportunity zones to provide annual updates to the Treasury Department -- a provision that was in the initial version of the legislation included in the 2017 Republican tax law, but taken out at the last minute for procedural reasons.

“Let’s not expect these investors to look back and sound like Mother Teresa,” said Representative Ron Kind, a Wisconsin Democrat, adding that the investors are there for a return on investment. Kind is a sponsor of the bipartisan House bill, H.R. 2593, which has a companion bill in the Senate.

There is bipartisan support for adding the annual reporting requirements, but that might be where the agreement ends when it comes to changing part of the 2017 GOP tax law.

“In the world I travel in, I haven’t come across any objections” to the reporting requirement, Representative David Schweikert, an Arizona Republican, said.

Focusing Investment

But Republicans could be could be more hesitant to change which areas qualify for tax breaks. That could undermine their version of the plan or upend investments that have already been made.

Democrats are also looking at ways to direct investment to areas that actually need the favorable tax status to attract capital. They have proposed offering bigger tax breaks to lower income areas and opening up new areas -- such as brownfields -- that aren’t currently eligible. Lawmakers are also discussing narrowing the number of zones so that the highest income ones, or those most likely to be developed without the tax break, wouldn’t qualify.

“There ought to be additional weight for the most distressed places,” Representative Dan Kildee, a Michigan Democrat, said. “At the high and low-end of the economic spectrum there are anomalies that need to be addressed.”

Republicans and Democrats on the House Ways and Means Committee held a closed-door meeting with Opportunity Zone investors, critics and supporters. The meeting came days after the New York Times reported that Treasury Secretary Steven Mnuchin weighed in on which areas qualified for the tax break to help his friend, billionaire Michael Milken. Mnuchin said he didn’t realize that Milken would benefit.

‘Safeguards’

Representative Bill Pascrell, a New Jersey Democrats, says he can’t find out how much money is being spent in the 25 opportunity zones in his congressional district.

He sent a letter to Mnuchin Tuesday demanding that the Treasury Department release information about when Treasury officials met with real estate developers seeking special treatment for opportunity zone breaks.

There are a few bipartisan bills in the House and Senate that would require more transparency of opportunity zones by requiring them to annually report data, such as assets and number of employees, to the federal government. Democrats say their main concern is making sure that favorable investment terms generate the intended benefits.

Opportunity zone investors can claim tax breaks by taking capital gains income they’ve earned previously and spend it developing distressed areas. New investments in opportunity zones can grow tax-free if investors hold them for at least a decade.

“I am concerned whether this measure, which was never vetted, was designed to ensure opportunity for tax avoidance or opportunity for economically disadvantaged areas to advance,” Representative Lloyd Doggett, a Texas Democrat, said. “We need to put in some of these safeguards.”

The House Ways and Means Committee plans to hold a hearing in the coming weeks.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu8@bloomberg.net;Laura Davison in Washington at ldavison4@bloomberg.net

To contact the editors responsible for this story: Joe Sobczyk at jsobczyk@bloomberg.net, Anna Edgerton, Wendy Benjaminson

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