An Unlikely Group Of Billionaires And Politicians Has Created The Most Unbelievable Tax Break Ever
Success Street in North Charleston, South Carolina, might be the most misnamed place in America, a path through a weedy, desolate neighborhood with 20% unemployment and a 40% poverty rate. Its biggest claim to fame strolls past the gritty brick apartment buildings and tumbledown bungalows on a muggy morning in late June: Timothy Scott, a local product who grew up to become the first black Republican U.S. senator in more than three decades. Joining Scott is another success story: the frenetic, peripatetic tech billionaire Sean Parker, who flew in by private jet from Los Angeles' ritzy Holmby Hills for a personal tour of the senator's hometown.
"I remember so many kids with amazing potential who died on the vine," Scott says as he surveys the shuttered Chicora Elementary School, where weeds climb the walls and graying plywood shields shattered windows. "The frustration, irritation and low expectations were so pervasive here that I always wanted to make a difference."
He now may get his chance. Today's visit is less a grim walk down memory lane than a legislative victory lap for Scott and Parker. The unlikely pair are core members of an even more unlikely group of conservatives and liberals, capitalists and philanthropists, U.S. lawmakers and small-town mayors who have successfully created one of the greatest tax-avoidance opportunities in American history, in the service of underperforming American cities and neighborhoods.
For all the focus on drastic tax-rate cuts, the fate of the state and local tax deduction and the exploding federal deficits, it's the least-known part of last year's tax-cut law that could be the most consequential. Officially called the Investing in Opportunity Act, it promises to pump a massive amount of cash into America's most impoverished communities by offering wealthy investors and corporations a chance to erase their tax obligations.
Too good to be true? "The incentive needs to be powerful enough that it can unlock large amounts of capital, aggregate that capital into funds and force the funds to invest in distressed areas," says Parker, the original Facebook president whose think tank, the Economic Innovation Group, created the policy and helped press it into law. "Instead of having government hand out pools of taxpayer dollars, you have savvy investors directing money into projects they think will succeed."
The heart of this new law: Opportunity Zones, or "O-zones," low-income areas designated by each state. Investors will soon be able to plow recently realized capital gains into projects or companies based there, slowly erase the tax obligations on a portion of those gains and, more significantly, have those proceeds grow tax-free. There are almost no limits. No limits on how much you can put in, how much tax you can avoid and, for most of the country, the types of taxes you can avoid, whether federal, state or local. No limits on how long those proceeds compound tax-free. And precious few limits on what types of investments you can make.
As Senator Scott rests against a rusting handrail at the abandoned school in his old neighborhood, he and Parker brainstorm what these investments could look like in North Charleston, which already has its O-zone designation. Real estate investors rehab the school into a tech incubator. Venture firms back the startups that emerge, while other funds launch automotive vendors and suppliers to serve the $1.1 billion Volvo plant recently opened 30 miles away. To help fight gentrification, impact investors can offer cheap renovation loans and subsidized mortgages so locals can benefit from rising property values instead of getting priced out. Finally, local government can take the new payroll-tax and property-tax revenues and reinvest them in the community to improve basic services and infrastructure.
In other words, systemic change. "This isn't about the redistribution of other people's wealth," Parker says. "It's the redistribution of their time, attention and interest." Senator Cory Booker has a name for O-zones: "domestic emerging markets."
"If we can get the trillions of dollars of capital off the sidelines and get the best investment minds coming into our communities," adds Booker, a New Jersey Democrat who cosponsored the bill, "we can end up creating jobs and opportunity."
As we said, it sounds too good to be true. If everything goes right, a big slice of the estimated $6.1 trillion of paper profits currently resting on American balance sheets is about to go to work to revitalize America's depressed communities. If all goes wrong, however, it will prove to be one of the biggest tax giveaways in American history, all in service of gentrifying neighborhoods and expelling local residents.
The genesis for the Opportunity Zone law traces to 2007, in the hills of western Tanzania, where Parker, after his famous Facebook exit, was checking out the UN's work on malaria prevention and economic development. The poverty was striking, and he saw little hope that the region would ever attract the kind of private investment that could deliver progress. Back home, he noticed similar problems in rundown areas around D.C. and San Francisco. At the same time, he was holding a Facebook stake heading into the billions, with many startup peers minting multimillions in equity as the social media boom took hold.
People were sitting on large capital gains with low basis and huge appreciation. There was all this money sitting on the sidelines," Parker says. "I started thinking, How do we get investors to put money into places where they wouldn't normally invest?"
He quickly became obsessed with the problem. Booker, then the mayor of Newark, was one of his early calls, which led to a dinner in San Francisco over expensive sushi. "Sean was going a mile a minute on this stuff," Booker says. "My time zone was three hours ahead, and I was pounding caffeine to keep up."
For Parker, a self-taught polymath, deep questions often lead to ambitious action. Long fascinated by the human immune system, he spent $250 million to create the Parker Institute for Cancer Immunotherapy. Curious about his life-threatening peanut allergy, he funded the Sean N. Parker Center for Allergy & Asthma Research at Stanford. His interest in the music industry led to the Sean Parker Institute for the Voice at Weill Cornell Hospital in New York. So it's not surprising that he'd eventually turn to policy. From the beginning, Parker's Economic Innovation Group, backed with $15 million, focused on the causes of inequity and the potential of using tax policy to force profits out of portfolios and into poor neighborhoods. "Peter Thiel bet me a million dollars that I wouldn't get it done," Parker says. "So that was part of my motivation."
He's a hard guy to bet against. In 1999, along with Shawn Fanning, he cofounded the free online music-sharing platform Napster, which blew up the recording industry—and later itself after triggering an avalanche of copyright lawsuits. In 2004, after seeing Facebook on a friend's computer, he used his Napster fame to score a meeting with a young Mark Zuckerberg at a Chinese restaurant in New York. He spent the next year as Facebook's first president, scaling the startup before clashing with investors, exiting with enough equity to give him a current net worth that Forbes estimates at $2.6 billion. He then became an early backer of Spotify, playing a large role in bringing the then-nascent Swedish streaming startup to the U.S.
More recently, Parker has turned his intense focus to philanthropy, donating more than $400 million in the past four years—a decent chunk, given that he's still in his 30s. For the problem of blighted neighborhoods, however, Parker sees his tax-avoidance policy as a better play: "You'll never solve domestic poverty by giving your money to a foundation. That's not going to achieve anything. What you need is trillions of dollars in investor capital." Parker built the Economic Innovation Group to be independent, bipartisan and pragmatic, "basically representing the poor people in America." To run it, he recruited Steve Glickman (a former senior economic advisor to President Obama) and John Lettieri (a government-affairs veteran who served as a foreign-policy aide to Senator Chuck Hagel). His economic advisory board included Kevin Hassett, Trump's chief economist, and Jared Bernstein, who held the same job for Vice President Biden.
The think tank quickly focused on crafting a policy that uses tax incentives to move investor cash into struggling communities. The group met with hundreds of lawmakers to share findings, hear feedback and build a base of supporters. Parker would visit Washington every few months for a marathon of meetings, slowly garnering promises of support. Parker boasts that he walked the congressional corridors until his feet ached and would lob late-night calls to top lawmakers for updates on the initiative. As the idea crystallized, other wealthy entrepreneurs, including Steve Case, Jim Sorenson and Michael Milken, jumped on the bandwagon.
By 2016 the Opportunity Zone bill had won the support of 72 legislators from both parties. It was ideological surf and turf. For Republicans, it promised a tax cut, a market-based solution and a way to put power in the hands of state and local governments. Democrats, meanwhile, liked the prospect of pouring money into areas in dire need of funding. Also in the idea's favor: It was new. "If you come up with something that's completely novel," Parker says, "there's no organized opposition against it."
That April, toward the tail end of the Obama administration, Scott and Booker introduced the bill on the Senate floor while Congressmen Pat Tiberi (R-Ohio) and Ron Kind (D-Wis.) proposed it in the House. They toyed with attempting to pass it as a stand-alone law but decided it was best to wait for some fast-moving legislation to hitch it to.
Parker had held a fundraiser for Hillary Clinton at his L.A. mansion, but Donald Trump's surprise victory—and the GOP's subsequent push to cut taxes—offered him an unexpected ride. "The opportunity was one that I thought was horrible—but Tim Scott thought was awesome," Booker says. "But for our bill, this was perfect, and we decided to make it part of the larger tax reform."
By now they had a bipartisan group of roughly 100 lawmakers sponsoring the bill. Speaker Paul Ryan and Senate Finance Chairman Orrin Hatch backed it.
Despite that broad support, O-zones were left out of the version of the tax cut passed in the House. A savior was Tim Scott, who had met with Trump and says he got the president's blessing for the provision. The bill's early sponsor, Scott was also a member of the Senate Finance Committee. He maneuvered to get O-zones into the Senate version of the bill. Once in there, the O-zone clause had life—but could very easily have been removed by the conference committee, a small group that worked out differences in the House and Senate versions of the bill.
The years that Parker and EIG had spent building a base paid off. "You prove that you're really into it—and that you're not going away," he says. Many conference-committee members had been O-zone sponsors. When President Trump signed the tax bill into law in December, the initiative was in there, but it was little-understood or hardly noticed.
By: Steven Bertoni
Next Article Previous Article