Opportunity Zones stray from original intent

‘Rich people shouldn’t be the beneficiaries’ of a federal program that gives investors tax breaks to help disadvantaged areas, critics say

By KEN WYSOCKY | October 2019

Census tract number 55079011300 on the north side of downtown Milwaukee doesn’t look like a disadvantaged area in need of urgent economic stimulus. Nonetheless, the tract is one of 120 statewide — and 34 in the city of Milwaukee — designated as a so-called Opportunity Zone.

The case for calling this tract economically distressed is not very compelling. Its median household income is a shade north of $43,000, roughly 10% more than the median income for Milwaukee residents overall. The median value of owner-occupied housing units is $210,100, compared to $115,800 citywide, according to the U.S. Census Bureau. And the poverty rate in the tract is 21%, barely above the 20% qualification threshold, census data show.

Moreover, the tract — a triangular-shaped parcel bounded by the Milwaukee River on the northwest, North Van Buren Street on the east and East Juneau Avenue on the south — hosts a variety of newer upscale housing complexes, including The North End, the Avenir, Rhythm and The Flatiron.

In addition, the recently approved Convent Hill South mixed-income apartment complex, a 32-story high-rise, will stand within the tract on a prime piece of downtown real estate at 1325 N. Jefferson St. Travaux Inc., the project’s developer, says the Opportunity Zone program will be an important funding source.

The tract also includes a swath of the Milwaukee School of Engineering campus, restaurants, taverns and many other businesses. In fact, websites for apartment and condo complexes in the area tout the neighborhood’s rich variety of art galleries, restaurants, pubs and numerous other amenities.

Yet the tract still meets the criteria for Opportunity Zone financing. This flagrant disparity between the distressed designation and economic reality vividly illustrates one of the problems with this federal program, which is coming under increasing criticism and scrutiny since it was enacted as part of the income tax code overhaul passed by Congress in 2017.

The goal of the zones is simple: Encourage investment in low-income, underserved urban areas by providing investors with tax breaks if they pump unrealized capital gains into special opportunity funds. The private-sector funds then must inject at least 90% of their capital into the more than 8,700 Opportunity Zones established nationwide, theoretically boosting disadvantaged areas.

The program aims to tap into an estimated $6 trillion in unrealized capital gains held by American households and corporations. But as The New York Times, The Wall Street Journal and several public policy think tanks point out, the program doesn’t always benefit the people it’s designed to help.

Criteria too broad

How does this happen? Part of the problem is the overly broad zone criteria, which allows census tracts to qualify even if they’re not truly economically distressed. Furthermore, there aren’t any requirements regarding what kinds of projects must be built in the zones, critics note.

As such, this has led to construction of upscale hotels, apartments, office towers and the like instead of projects that benefit low-income residents, says Stan Veuger, an economist for the Washington, D.C.-based American Enterprise Institute, a public policy think tank.

“You can look at the criteria and tell that a lot of people will benefit from this program that don’t need federal support,” he says. “If you’re going to try to present it as a poverty-prevention program, rich people shouldn’t be the beneficiaries.

“A lot of the tax benefit goes toward infra-marginal projects that would happen regardless” of Opportunity Zone incentives, he adds. “That’s exactly what people critical of the program warned about.”

The head of a local government watchdog group agrees. Chris Kliesmet, executive administrator of CRG Advocates (Citizens for Responsible Government), says there are census tracts in impoverished areas of Milwaukee that need more help than the one downtown.

The upscale Sanford Restaurant, at 1547 N. Jackson St., is located in the Opportunity Zone. SANFORD'S FACEBOOK PHOTO“This area already is doing very well,” he says, pointing to the tract’s thriving, high-end housing and businesses. “Go on Google maps and look at all the businesses there. … Sanford is smack dab in the middle of this tract,” he says, referring to one of Milwaukee’s premier upscale restaurants.

Furthermore, the gentrification of these designated census tracts eventually will raise housing costs, which theoretically will displace the same low-income residents the program is designed to assist, experts observe.

So how were the Opportunity Zones in Milwaukee selected anyway?

First, city officials submitted a list of 165 qualified census tracts to then-Gov. Scott Walker. In turn, he relied on guidance from the Wisconsin Housing and Economic Development Authority (WHEDA) to determine which census tracts to designate. Governors were given authority to designate up to 25% of their states’ qualified census tracts as zones.

“How Governor Walker narrowed that list was not shared with us,” Jeff Fleming, a spokesman for the city’s Department of City Development, wrote in an email.

When specifically asked why WHEDA designated census tract number 55079011300 as an Opportunity Zone, a spokesperson emailed a reporter a copy of a March 2018 letter to Walker from William Martin, then the business and community engagement director for WHEDA. The letter listed all of the zones selected and the criteria and methodology used to make the zone determinations.

“WHEDA worked with internal and external analysts to evaluate all 479 potentially qualifying census tracts in Wisconsin,” the letter states. “The analysis took into account a wide array of factors that not only considered economic distress, but also the prior history of attracting public-private economic development and access to the infrastructure and other assets that can increase an area’s ability to attract and sustain future economic development.”

Ken Wysocky of Whitefish Bay is a freelance journalist and editor.

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