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Don’t Let ‘Opportunity Zones’ Be Just Another Tax Loophole

Don’t Let ‘Opportunity Zones’ Be Just Another Tax Loophole

(Bloomberg Opinion) -- Treasury Secretary Steven Mnuchin has said he expects investments in “Opportunity Zones” to top $100 billion eventually. He’s referring to an initiative — part of the 2017 tax law — that lets investors in qualifying funds defer and avoid tax on investments in areas designated by their state and the Internal Revenue Service as economically disadvantaged.

The idea is fine in theory. But the program needs to be carefully watched.

There’s a lot of early interest. At least 90 funds have been set up to take advantage, with tens of billions of dollars already earmarked. The estimated cost of the program is $1.6 billion over a decade, but could be higher if investor demand stays strong. Taxpayers are entitled to know whether these tax preferences are working as they’re supposed to, and serving a legitimate public interest.

The initial controls are lax. It’s early days — but, as things stand, funds can in effect deem themselves to be bona fide, without the IRS weighing in. Some fund managers and investors are working together to establish their own accountability standards, which is commendable, but the administration shouldn’t see this as sufficient. 

In particular, Treasury hasn’t said much about the funds’ reporting requirements. In new guidance expected soon, this needs to be put right. Funds should be told to disclose annual details about each individual project — including purpose, exact location and financial commitment. (Calling for data aggregated at the level of the fund isn’t good enough.) Failure to provide this information should be disqualifying.

Some investors may complain that compiling the data is burdensome, but that’s implausible: Managers ought to have the relevant information at their fingertips. Concerns have also been raised about the disclosure of sensitive information, but this issue can be dealt with. Treasury already has procedures in place for a different program that grants tax credits to investors in low-income communities, making sufficient information public while taking care to protect necessary confidentiality. 

Making opportunity zone data public will let outsiders judge whether the tax relief is helping local neighborhoods as intended. If the project is meant to promote employment, are jobs being created for local residents? If its purpose is to provide affordable housing, is that happening? Critics say these policies give benefits for investments that would have gone forward anyway and most of the money flows to prosperous rather than depressed areas. Good public data will show whether this is true — and the requirement to provide it will guard against abuse.

Editorials are written by the Bloomberg Opinion editorial board.

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