More fake news. New York Times doesn’t understand Opportunity Zones
A New York Times (NYT) reports that President Trump’s tax cuts once again benefited his wealthy friends and not average Americans. (“How a Trump tax break to help poor communities became a windfall for the rich”) It appears that the NYT doesn’t fully understand how business, economics and public policy work together. And this lack of economic literacy produces more fake news.
As part of the tax cut that Congress passed in 2017, special tax treatment was given to certain sections of the country. These sections were mostly inner-city, low-income areas that really needed redevelopment. The goal of these Opportunity Zones (OZ) is to encourage developers to invest in poor neighborhoods. The new development would replace blighted, drug invested and high crime areas.
Opportunity Zones also lead to “new housing, business, and jobs.”
New York Times says Opportunity Zones are a scam.
The New York Times claims the Opportunity Zones are a scam. That wealthy investors are using the Trump tax breaks to build luxury residences for high-income people. There are few new permanent jobs created. There is no low-income housing. The NYT claims that many of Trump’s developer friends are taking advantage of the tax breaks and high real estate prices to earn tens of millions of dollars. That real people are not benefiting.
The New York Times needs a more well-informed understanding; one that would explain exactly what is happening and how it will do exactly as intended. The only gripe may be about who has more chocolate milk in their glass. (chocolate milk syndrome).
In order to achieve the goals, new development must occur in areas that are otherwise too risky to lure private developers. In other words, market conditions are such, that the potential profit to a developer was not large enough to compensate for the increased risk. So developers looked elsewhere and the area stayed stagnant. The tax incentives are meant to change that.
The government knows what policy actions actually work.
The Government knows that a relatively simple public policy action will encourage investment. Just increase the size of the expected profit to compensate for the high risk. The federal government does that by eliminating the tax on capital invested and by eliminating federal income tax on the earnings from development. Now developers see a larger potential profit potential which offsets the increased risk.
Typically the Opportunity Zones are on the fringe areas of major cities. The affluent live in the center of most cities. The housing further from the center is generally less expensive. Then there are fringe areas which are where the opportunity zones are located.
However, way too often the fringe areas are only a few city blocks from the more affluent.
Developers found that higher-income earners were paying high prices for real estate just a short distance from the edge of Opportunity Zones. Perhaps those people would look to live a little further away. Their idea seems to be working as the New York Times notes with many affluent residences being built in the opportunity zones.
As that happens, other developers will be attracted both to the Opportunity Zones and to areas around the Opportunity Zones. This new development will provide jobs for those in the construction industry. The jobs will last beyond one project as more development is attracted.
And these are jobs that teach skills.
In addition, the businesses currently in the area, from restaurants to shops, will see increased volume. Many will upgrade and new businesses will open.
That too will provide jobs and increased profit for local businesses.
Regarding the housing, in many areas, it will be higher priced, at least at first.
Often as members of the community become more prosperous, more moderate-priced housing may be built in the Opportunity Zone or the surrounding areas. The new housing will lead to new vibrant neighborhoods.
Although this takes many, many years, the results can be very profound. In some cases properly used tax incentives can really turn around a blighted area. Philadelphia, for instance, used a real estate tax abatement program to really revitalize that city.
But the New York Times sees things differently. They look at all the large, east coast real estate developers who have greatly profited from these tax breaks. And of course, it is true. As noted, if it wasn’t for the large profit, the risk would be too great to invest in the blighted areas.
As for the developers being President Trump’s friend, that’s true too. In order to undertake projects that require millions of dollars out of pocket and often tens of millions or more in debt, the developer must be a large enterprise. There are a limited number of very large developers in any area and yes they are all likely to know each other. Many may be friends.
Once again the New York Times lack of understanding has produced fake news. And they should stop worrying about how much chocolate milk somebody else has in their glass.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years. @mbusler www.facebook.com/fundingdemocracy