Treasury Department Invites Abuse of Opportunity Zones

(Bloomberg Opinion) -- The Treasury Department has missed a chance to repair part of the 2017 tax law — one that tax planners are finding especially interesting. The provision in question lets investors defer and avoid capital gains tax by investing in so-called opportunity-zone funds, which finance projects in disadvantaged areas. In principle, supporting new enterprise in such places is a good idea, so long as controls are in place to prevent abuse. Unfortunately, they aren’t, and new official guidelines don’t put this right.

Investors were paying a lot of attention to opportunity zones even before Treasury issued its most recent regulations. Now they’ll be even more excited, because they’ve been given more clarity about the kinds of investments that are eligible and the government has signaled that it intends to be flexible. That’s well and good, but the need for effective supervision will be all the more important if the opportunity-zone funds prove as popular as seems likely. And the issue of lax controls still hasn’t been properly addressed.

Treasury has invited public comment on the information that funds should be required to report to the Internal Revenue Service — but right now the funds can still in effect regulate themselves, qualifying for the relief without the IRS weighing in. Better rules might or might not follow the public-comment period, but that could be many months away. By then, billions of dollars could have flowed into the funds, and tracking that money retroactively or trying to recover tax relief improperly granted could be difficult or impossible.

The delay in addressing this issue needn’t have happened. Dozens of groups started submitting comments to Treasury as early as last year, and the information that ought to be required and made public for tax breaks to be granted is straightforward: purpose, exact location and financial commitment for each project, on an annual basis. Aside from the need to judge whether taxpayers’ money is being well-spent, this information is necessary for the IRS to assess appropriate penalties for not complying and pursue instances of abuse.

Senators Tim Scott and Cory Booker, who were behind an earlier version of the opportunity-zone provision, are planning to unveil a bill that would call for more disclosure, but Democrats in Congress seem unwilling to tweak parts of the tax-reform legislation — they'd rather take the whole thing and start over. So Treasury will have to step up, and the sooner the better. Otherwise a promising idea risks being discredited by abuse that could easily have been avoided.

Editorials are written by the Bloomberg Opinion editorial board.

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